Legal and Ethical Issues Relating to Hostile Takeovers
The field of business is considered as one of the most important sectors in the society. It is the one responsible in providing the goods and services that almost all people need to survive. The business sector also greatly contributes to the economic robustness of a country in terms of the income that it accumulates because of the local and foreign operations within this sector. Nevertheless, the nature of the business sector operates under very stiff competition. Small, medium, and large sized companies tend to compete with each other in order to acquire the most number of clienteles and eventually gain larger profit. This kind of practice is considered to be advantageous when businesses try to enhance its operations so that they could outplay other countries. The customers tend to benefit from this because they could purchase quality goods and avail of competent services. However, there are also instances wherein competition gets out of hand to the point that it becomes illegal and unethical. This type of situation is greatly exemplified by hostile takeovers.
In relation to these, it is the objective of this paper to elaborate on the concept of hostile takeovers within companies. This paper will discuss the situations that make companies susceptible to this process. The advantageous and disadvantageous effects of hostile takeovers for companies will also be taken into consideration. Hostile takeovers will also be criticized in order to identify whether it is good or bad for the business specifically for the American economy. This paper will also look at the legal dimension of such practice. Moreover, a discussion of the different ethical theories in connection with hostile takeovers will also be done to see which among these make this practice acceptable. Lastly, an analysis on hostile takeovers in terms of whether it is the right action to take in order to improve the economy or it actually makes matter worse will also be determined.
Definition of Hostile Takeover
Hostile takeover is defined as a “type of corporate takeover which is carried out against the wishes of the board of the target company” (Smith). This is an unusual kind of acquisition because it does not take place nearly as much as friendly takeovers, wherein two companies work together as they deem that the takeover is beneficial for both parties. Hostile takeovers can be a traumatic experience for the company that is being targeted. Furthermore, this can also be risky for the company who will takeover especially at the event that it fails to acquire the necessary and relevant information regarding the target company (Smith).
Almost every day, companies are being bought and sold. Two types of sale agreements exist in these processes. The first sale agreement is referred to as the merger. Merger takes place when two companies collaborate with each other by means of blending their assets, staff, facilities, and other resources. After the merger, the original company no longer exists as a new company is established. In this kind of takeover, a company is bought by another company. The purchasing company has the ownership of the target company’s assets, which includes company patents, trademarks, and others. The operations of the original company may be controlled by the purchasing company or it may operate semi-independently under the authority of the company that acquired it (Smith).
Usually, a company that wants to obtain another company approaches the board members of the target company with an offer. The board members of the target company will consider the offer and they have the discretion to accept or reject it. The offer will be accepted by the board if they deem that it will give long-term beneficial effects for the company. On the other hand, the board may reject the offer if the terms and conditions of the purchasing company do not sit well with them and if they believe that it will not enhance the welfare of their company. However, when a purchasing company pursues the takeover regardless of the rejection of the board, this is considered as a hostile takeover. Furthermore, if the company entirely sidesteps the authority of the board, then it is also considered as an example of a hostile takeover (Smith).
There are two primary methods of conducting a hostile takeover namely: tender offer and the proxy fight. A tender offer is a public bid for a huge amount of the target’s stock that is set at a fixed price. Most of the time this fixed price is higher than the actual market value of the stock. The interested buyer of the stock will use a premium price in order to encourage the shareholders to sell their shares. However, the offer is done in a limited time and it has other provisions that the target company should follow if ever the shareholders agree to the offer. The bidding company must inform the target company of their plans and they should file the necessary legal documents to the Securities and Exchange Commission (SEC). This is in adherence with the 1996 Williams Act that put restrictions and provisions with regards to tender offers. At times, interested purchasers will gradually buy stocks in small amounts until it is enough to gain control of the company without creating a public tender offer, which is known as the creeping tender offer. This practice is very risky because if the target company discovers the takeover, it could do the necessary steps in order to prevent it (Grabianowski).
In a proxy fight, on the other hand, the purchaser does not make any attempt to buy the stock. Rather, the interested buyers will try to convince the shareholder to vote out the current board of directors or management. In doing so, they can support the party that is in favor of the takeover. The word “proxy” pertains to the ability of the shareholders to allow others to make their vote for them. Proxy fights usually starts within the company. Dissatisfied shareholders or managers might ask for a change in the company ownership, which they can do by convincing other shareholders to collaborate with each other. Proxy fights are very popular because it bypasses the company’s defenses that aid them in preventing takeovers. Most of these defenses are sidestep by changing the standpoint of the people who already own the stock (Grabianowski).
Reasons for Hostile Takeovers
There are numerous reasons as to why a particular company might want and even need a hostile takeover. The acquiring firm may believe that the target firm is capable of generating more profit in the future as compared with its selling price. This could be exemplified by a company that can make $100 million profit each year, which is why buying the company for $200 million is actually reasonable. This is also the reason that many corporations have subsidiaries that have nothing in common with the main company. They only bought other firms for financial purposes (Grabianowski).
Sometimes, there are instances wherein the target company does not want to be acquired. The main reason that the target company does not want to be purchased is because they simply want to operate independently. Members of the board might avoid acquisition because they are usually replaced after the buyout process is already finished. As such, the management is only protecting their jobs. The board or the shareholders might also believe that accepting the deal to purchase their company would reduce its value or place it in a very disadvantageous position that might put the company out of business. In such cases, where the approval of the board is difficult to obtain, hostile takeover is necessary to make the acquisition. There are also some instances wherein the purchasing company use hostile takeover because it is done in a faster pace. The management can also have better terms with such practice rather than negotiating a deal with the target company’s shareholders or board of directors.
Publicly traded companies are most susceptible to hostile takeovers since opposing companies can easily purchase large amounts of their stock in order to gain control of their share. In this case, the purchasing company does not have to take into consideration the feelings of the board because it already owns as well as controls the firm. Hostile takeovers can also be executed by using tactics that involve deals that are beneficial to the individual board members in order to get their approval. However, the purchasing company may face serious risks in conducting a hostile takeover because the non-cooperation of the target company entails curtailing important information about the situation of the company. As such, the acquiring firm may take on debts and serious problems. Furthermore, acquiring financing for hostile takeovers can be difficult because some banks are unwilling to lend funds in this kind of cases (Smith).
Advantages and Disadvantages of Hostile Takeovers
Hostile takeovers have its respective advantages, which is clearly elaborated by its defenders. People who support hostile takeovers assert that companies become targets of takeover when the current management is incompetent or reluctant to make the necessary steps in order to increase shareholder value. The purchasers’ eagerness to pay a premium amount for the stock only shows that the company is not reaching its full potential under the leadership of the incumbent management. Their decision to takeover in a company is driven by the belief that they could increase the company’s worth to reach the value of what they are offering. Shareholders usually have a hard time in replacing the current management through the traditional proxy contest, which is why they opted for hostile takeovers. Hostile takeovers are an important way for shareholders to recognize the real value of their investment. This kind of practice entails difficulties especially during the process of restructuring wherein the employees, communities, and other groups have to adjust with the new policies of the management. However, the increased wealth and productivity that comes with this takeover will eventually become beneficial for all the stakeholders of the company (Boatright 154).
The mere threat of a takeover already serves as an essential means in order to check on the performance of the management. Defenders of hostile takeovers argue that the absence of this constant spur would only give managers less incentive to protect the full value of the stocks for its shareholders. In terms of the market for corporate control, defenders believe that the shareholders should be the primary arbiters that should hold the control in the corporation. Moreover, they also assert that a purchaser who bought a stock yesterday has the same rights as long standing shareholder. Being the case, any attempt to resist the new shareholders decision for a takeover is an infringement of that shareholder’s rights (Boatright 154).
On the other hand, the critics of hostile takeovers tend to challenge the benefits that could be gained from it and they highlighted its detrimental effects. Sometimes, the targets of hostile takeovers are broken up and sold off in portions or are even downsized and folded under the umbrella of the purchasing company. In this kind of process, the employees are laid off from work and communities lose their economic groundings. Generally, takeovers burden companies with debt loads that restrict their options as well as place them into a higher risk especially in the event of a downturn. Critics also pointed out that companies are forced to defend themselves by means of administering for immediate results and engaging in expensive defensive measures. The threat of hostile takeovers may have its advantageous changes on the corporation but such activity only serve for the primary interest of enriching investment bankers and lawyers. The benefits that the shareholders of the companies acquire come at the expense of others. It is also important to remember that not all hostile takeovers came from sound financial decision making. In relation to this, changing control decisions should not solely be based upon financial considerations as it is too important to simply be dependent on such. Furthermore, the market for corporate control should be broadened so that it will not only include the interests of shareholders, other actors should also participate like the government (Boatright 154-155).
Effects of Hostile Takeovers to the American Economy
The debate regarding hostile takeovers mainly revolves around the concern on whether they are good or bad for the American economy. This issue greatly concerns economic analysts. Based on the evidences that they gathered, takeovers generally increase the value of the targeted and purchasing companies. This assessment is based on some of the following results. Economic analysts explain that not all takeover targets are underperforming businesses that have incompetent management. There are other factors that must be considered in order to takeover a company. This could be exemplified by the “bust-up” takeover, which operates under the premise that a company is worth more if it is sold in parts rather than as a whole. Purchasers could be able to finance a takeover by using the company’s own assets by means of large cash reserves, expensive research programs, and other means of savings. Moreover, expensive commitments to stakeholder groups can also be tapped so that a takeover could be financed (Boatright 155).
Nevertheless, critics of hostile takeovers assert that the favorable results of takeovers for the American economy should be viewed with caution. They deem that even though there is an increase in the value of targeted companies as well as the purchasing companies, this is only perceived as short term because the long-term benefits are still vague. This idea could be exemplified by cases wherein the apparent wealth that is created by takeovers are merely a result of accounting and tax rules that benefit shareholders but in reality there is new wealth that is being created (Boatright 155).
The Legal Dimension of Hostile Takeovers
Takeovers have been a widely observable event in the business sector. As such, legal provisions are also made in order to ensure that companies, especially the one being acquired is protected against the irregularities and drawbacks of such kind of practice. A good example of this is the Williams Act of 1968 that amended the Securities and Exchange Act of 1934. This requires a mandatory disclosure of all information that has something to do with the cash tender offers. A tender offer takes place when an individual, group, or corporation wants to get the control of another company. Tender offers are proposals with the objective of buying shares of stock from shareholders for cash or other type of corporate security that comes from the purchasing company (“Williams Act”).
Due to numerous abuses when it comes to cash tender offers, the Congress passed the Williams Act in 1968. Its main purpose is to require the full and fair disclosure of information for the well-being of the shareholders and at the same time, it also paves the way for the targeted and purchasing company to fairly present their cases (“Williams Act”).
Ethical Dimension of Hostile Takeovers
Hostile takeovers have also been of great interest in the field of ethics. Numerous theories by various philosophers are being applied with regards to this practice in order to see whether hostile takeovers are indeed ethical or not. Some of these theories are: Kantian Ethics, Rawls Egalitarian Theory, Libertarianism of John Locke, and Virtue Ethics of Aristotle.
The Kantian Ethics is grounded upon the teachings of the philosopher Immanuel Kant. The main principle of the Kantian ethics revolves around the concept of “motive” wherein it is believed to be the most essential factor in determining whether an action is ethically upright. Kant also asserted that a moral action is performed out of a “sense of duty” (“Kantian Ethics”). In this sense, Kantian ethics would only support hostile takeovers if the intention of the acquiring firm is considered as upright. If the intention of the purchasing firm is similar with what the defenders of hostile takeovers are saying then it can be regarded as ethical. Taking over a firm in order to make the shareholders realize the true value of their stocks as well as aid in making sure that the management is doing their job are considered as morally upright motives. However, if the only intention of the acquiring firm is to gain more profit by taking over the company regardless of the welfare of the shareholders and other employees of the company, then, this is regarded as an unethical behavior.
Rawls Egalitarian Theory of Justice is named after its proponent John Rawls. The principle of equal liberty or egalitarian is one of the two general principles of justice that Rawls believes governs the structure of society in the real world. The Egalitarian Theory of Justice states that every individual has an equal right to the most extensive liberties that are compatible with the other liberties of all people. It is considered as egalitarian since it distributes general liberties to all people equally. In relation to this, it also distributes equal opportunities for individuals to be considered in offices and other positions (Rawls). Being the case, Rawls Egalitarian Theory of Justice does not support hostile takeover because it tends to bypass the rights of the shareholders and the management. Moreover, in most usual cases of hostile takeovers the terms and conditions in the deal usual favors the acquiring firm which defeats the very purpose of equality that makes an action ethical in Rawls’ theory.
The philosophy of Libertarianism was proposed by John Locke. Locke defended in this theory that individuals are by nature free and equal. He asserted that people have rights such as: right to life, liberty, and property. The concept of the social contract is also proposed by Locke wherein the people transfer some of their rights to the government in order to ensure the stable and comfortable enjoyment of their rights. Because of the idea that the government exists through the consent of the people, governments that fail to do their responsibilities can be overthrown by the people and replaced by a new one (“Locke’s Political Philosophy”). Having these principles in mind, Locke’s Libertarianism is applicable with hostile takeovers. In the case of hostile takeovers, the current management has the characteristic that is similar with the government. The management has the responsibility to see to it that the interests and rights of the shareholders are being protected and that their stocks are in good hands. If the stakeholders believe that the management is no longer doing this duty then, they have the right to replace them. Hostile takeovers involve an acquiring corporation, which deems that the targeted company is not reaching its full potential due the incompetence of its management. As such, they will make the necessary steps in order to obtain some stocks. In this sense, they become members of the shareholders that have the right to replace the management. Being the case, it is operating under the premise that they are merely protecting the rights and interests of the shareholders, which makes their actions ethically acceptable.
Aristotle’s Virtue Ethics is initially identified as the theory that gives emphasis on the moral character of an individual. It focuses on the virtue or values of a person rather than his or her duties or motives. Virtue ethics does not give much importance on the consequences of an action but rather it focus on the how a particular act could enhance and maximize the virtue of a person (“Virtue Ethics”). In this case, Virtue ethics is not applicable in hostile takeovers because this kind of practice termed as “hostile” because of the persistence of the acquiring firm to get the targeted company despite the rejection of the company being acquired. As such, this does not respect the rights or feelings of other people, which eventually does not develop the values within a person.
Hostile takeovers do not improve the economy rather, it actually makes matters worse. The kind of process that is involved in such practice wherein the acquiring firm bypasses the targeted company’s management and the non-cooperation in the disclosure of important information only give way to greater risks. The irregularities of hostile takeovers can actually cause the removal of employees from their work and even the actual downfall of the business. Moreover, most ethical theories do not support hostile takeover because it infringes the rights of the shareholders and the management as well as disregard the feelings of the stakeholders that are involved. Lastly, there are still other amicable means that could be done in order to merge or buy another company. In doing so, it would lessen business risks and still respect the rights of other people.
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