Friendly Takeover vs. Hostile Takeover

A corporation's board of directors might not be able to prevent a takeover.

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The shares of a publicly traded corporation can be purchased by a variety of people and organizations. Consequently, a shareholder or a group of shareholders can accomplish a takeover by purchasing a large percentage of a corporation's shares. The terms "friendly takeover" and "hostile takeover" refer to corporate directors' reaction to the takeover.

Share Structure

A corporation does not operate on a "one man, one vote" principle -- it operates on a "one share, one vote" principle, although it may issue certain classes of shares without voting rights. Consequently, a single shareholder who owns more than 50 percent of a corporation's common shares can outvote all other shareholders combined. If shareholding is widely dispersed, less than 50 percent of its shares may be necessary to gain a controlling interest in the corporation. To control a corporation, you must have the power to appoint its directors and, through the directors, to appoint its officers.

Friendly Takeovers

A friendly takeover consists of a merger between two corporations or the acquisition of the shares or assets of one corporation by an entity or an individual, with the approval of the directors and the shareholders of both corporations. In a merger, one of the two corporations is known as the "surviving corporation," and the other corporation disappears as an independent legal entity. Shareholders in the disappearing corporation are issued shares in the surviving corporation. Another way to take over a corporation is to simply purchase a controlling interest in the shares of another corporation, or purchase its assets. If both parties are companies, the combination of resources may allow them to take advantage of economies of scale and to streamline operations by eliminating redundant divisions.

Hostile Takeovers: The Tender Offer

A hostile takeover of a corporation results from a takeover that is opposed by the target corporation's directors. In a tender offer, an acquiring entity offers the target corporation's shareholders cash in exchange for their shares. If the acquiring corporation obtains enough shares, it can approve a merger resolution or, alternatively, simply operate the corporation as its subsidiary by replacing its directors and officers with its own appointees and direct corporate affairs in this manner.

Hostile Takeovers: The Proxy Fight

Corporate shareholders are entitled to vote on shareholder resolutions by proxy -- authorize someone else to vote their shares for them. In a proxy fight, the acquiring entity or individual seeks such proxy voting authority from the shareholders of the target corporation. With proxy authority, the acquiring corporation can take effective control of the target corporation by replacing its directors and officers, approving a merger resolution or approving the issuance of new shares.