"Hostile" vs. "friendly" takeovers

In previous posts (World Index of Economic Freedom) we have talked about how the US legal and regulatory regime encourages the movement of assets to higher-valued uses. But this is not the case for our largest and most valuable assets, corporations. CATO tells us that the US may be losing its edge to the UK.

In the United States, tender offers are regulated under the Williams Act amendments to the Securities and Exchange Act of 1934. That regulation is considered relatively shareholder-friendly. Less friendly to shareholders, however, is the treatment of target managers’ responsibilities in the face of an unwanted takeover bid. Managers of a target company are permitted to use a wide variety of defenses to keep those bids at bay. The most remarkable of the defenses is the “poison pill” or shareholder rights plan, which is designed to dilute a hostile bidder’s stake massively if the bidder acquires more than a specified percentage of target stock — usually 10–15 percent. Poison pills achieve this effect — or more accurately, they would achieve this effect if they were ever triggered — by, among other things, inviting all of the target’s shareholders except the bidder to buy two shares of stock for the price of one. The managers of a company that has both a poison pill and a staggered board of directors have almost complete discretion to resist an unwanted takeover bid.

In contrast, UK takeover regulation has a strikingly shareholder- oriented cast. The most startling difference comes in the context of takeover defenses. Unlike their U.S. brethren, UK managers are not permitted to take any “frustrating action” without shareholder consent once a takeover bid has materialized. Poison pills are strictly forbidden, as are any other defenses, such as buying or selling stock to interfere with a bid or agreeing to a lock-up provision with a favored bidder, that would have the effect of impeding target shareholders’ ability to decide on the merits of a takeover offer.

However takeover activity is still higher in the US, but now most of the takeovers are "friendly" not "hostile." And just to be sure that you are not confused by nomenclature, "friendly" means "hostile to shareholders."