Hostile business takeovers occur when one business attempts to seize control of another by purchasing controlling equity directly from shareholders. Hostile takeovers can also occur when a company infiltrates the target company’s management class and ushers in an acquisition deal.
Hostile takeovers are characterized by the circumstances under which they take place. Specifically, the target company’s management does not want such an acquisition deal to take place. Owing to the target company’s general unwillingness to be taken over, acquiring companies engaging in hostile takeovers may be met with significant obstacles.
To circumvent the existing management's wishes, acquiring companies may attempt a hostile takeover via three primary avenues:
Producing a Tender Offer - This is a cash offer to purchase controlling shares of a target company above their market price. The Williams Act of 1968 governs the conditions that must be met for tender offers. Acquiring companies must specify offer terms, the capital source used to fund the acquisition, and an action plan for the company if a takeover is successful.
Purchasing Equity on the Open Market - If a board of directors rejects an attempted tender offer, an acquiring company can make an offer to the target business's shareholder directly. Unlike a creeping takeover, a hostile takeover of this type typically plays out quickly.
Engaging in a Proxy Fight - This final takeover method leverages the voting power of stockholders' shares to push for acceptance of a takeover deal. Stockholders are convinced to facilitate the takeover by supporting the acquiring organization's voting preferences. This often means voting out existing management team members in favor of new members sympathetic to the acquiring company's goals. This ultimately leads to infiltration of the target business. However, this approach can take a substantial amount of time to execute.
In simple terms, a hostile takeover refers to one company taking control of another company that prefers to remain independent. In contrast, a friendly takeover is one that the target company’s board of directors or stakeholders agree to.