A hostile takeover occurs when one corporation, the acquiring corporation, attempts to take over another corporation, the target corporation, without the agreement of the target corporation’s board of directors.
A friendly takeover occurs when one corporation acquires another with both boards of directors approving the transaction. Most takeovers are friendly, but hostile takeovers and activist campaigns have become more popular lately with the risk of activist hedge funds.
A hostile takeover is usually accomplished by a tender offer or a proxy fight. In a tender offer, the corporation seeks to purchase shares from outstanding shareholders of the target corporation at a premium to the current market price. This offer usually has a limited time frame for shareholders to accept. The premium over the market price is an incentive for shareholders to sell to the acquiring corporation. The acquiring company must file a Schedule TO with the SEC if it controls more than 5% of a class of the target corporation’s securities. Often, target corporations acquiesce to the demands of the acquiring corporation if the acquiring corporation has the financial ability to pull off a tender offer.
In a proxy fight, the acquiring corporation tries to persuade shareholders to use their proxy votes to install new management or take other types of corporate action. The acquiring corporation may highlight alleged shortcomings of the target corporation’s management. The acquiring corporation seeks to have its own candidates installed on the board of directors. By installing friendly candidates on the board of directors, the acquiring corporation can easily make the desired changes at the target corporation. Proxy fights have become a popular method with activist hedge funds in order to institute change.