Okay, I imagine as a small business you probably haven’t faced a hostile takeover of your company by a rival or an interested group of investors or even by your fellow shareholders. Yes, your shareholders can mount a takeover of your shares and do it successfully. This can be a very painful experience particularly if it is a company you founded and nurtured as a startup.
In corporate finance, there are certain techniques that accountants use to mount to defence in the event of a takeover. Some of them have funny terms but have been used successfully in the past.
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Poison Pill
A poison pill is a tool used by directors of a company who do not support a takeover bid. The tactic is to offer shareholders who are not involved in the takeover incentives to buy shares at a cheap price after a takeover bid has been completed. The effect being that the shareholder who takes over will see his ownership diluted in due time. For example, your company suddenly gets targeted by an investor who has convinced some shareholders to sell their shares to him giving him a 40% ownership of the company.
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If however, in the past there existed a shareholder agreement that gives existing shareholders (prior to the new investor joining the company) a discount on future sale of shares in the company. The effect of this is that this may dilute the 40% owned by the investor and will now need to spend more to get back to 40%. A proposition that most hate to face.
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Shark Repellant
This involves altering the Memorandum and Articles of An Association (MEMAT) in such a way as to make takeovers very difficult to achieve. For example, you can enshrine in your MEMAT that before a takeover of a company can be achieved the shares being sold by the willing sellers must be up to 80% of the outstanding shares of the company. So, if you own 30% of a company you started and your partners suddenly want to sell their shares to an investor you do not like, this method simply stops them from achieving that. But remember, this only works if you are able to show that this is enshrined in the MEMAT of the company.
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Golden Parachutes
Whilst not totally beneficial to the shareholders Golden Parachutes are a set of clauses that warrants that any takeover bid that involves the loss of jobs will force the buyers to pay severance to the employees of the organisation who may have lost their jobs due to the takeover. This is particularly useful to companies with employees who are pioneer staff. A golden parachute ensures that they are well protected in the event of a takeover which quite naturally triggers a change of management and key personnel.
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White Knight
As the name suggests, a White Knight is a friendlier acquirer who a target company may approach to fend off a hostile acquirer. For example, your company may be failing to deliver on its promises for improved returns necessitating your partners asking that the company be sold. They now put forward a buyer that you loath for whatever reason. Being a founder, you are against the deal and to therefore show you have a better offer, you look for companies you prefer in the hope that they offer a better price.
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Greenmail
A Greenmail is an antitakeover tactic used to block the purchase of your company from a hostile acquirer. For example, an investor has gone behind your back acquiring shares from your partners, say for N2 per share. Having discovered and with little or no option you decide to approach the hostile acquirer asking that you buy back those shares at a premium. This is what is called a Greenmail. For this tactic to work you must be ready to play ball. Besides Greenmail can be dangerous too because it might lead to other people attacking you making you vulnerable to keep playing defence.
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Pacman Defence
As the name suggests it is a counter-attacking tactic that involves a target company buying back the shares of its hostile acquirer. For example, an investor or a rival is gradually buying up your shares so as to mount a bid for the takeover of your company. Upon noticing, you decide to attack the acquirer by buying shares in his company as well. That way every attempt he is making on your company is neutralised by the attempts you are making on him too.
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Lockup Defence
Assuming that you have the patent to a program that your customers love to use. You have made so much money from it now your partners think it’s time to move on and decide to sell their shares to some new investor at a premium. To dissuade them, all you need to do is sell the program since it is the reason why your company is a target. Your shareholders may not like it but if that is the only option you have then that’s it. You must also be sure that you can repurchase that program or have what it takes to build another cash-generating program.
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Sandbag
Sandbag is a system whereby the management of a company purposely delays the process of selling the company in the hope that they will find a better offer. This of course works when you as the major stakeholder is willing to stake out for a better buyer.
People Pill
People Pill is basically a threat by management that they will jointly resign should the company shareholders agree a takeover. This will work for you if your partners have no technical input in your company and simply rely on you to drive earnings. The risk for them is that you are the main asset and as such once you resign the company will go bust.
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This article was first published on Nairametrics in August 2019.
