# Hostile Takeover Explained: What It Is, How It Works, and Examples

## What Is a Hostile Takeover?

A hostile takeover happens when an entity takes control of a company against the wishes of the company's management. It's an acquisition strategy requiring that the entity acquire and control more than 50% of the voting shares issued by the company.

### Key Takeaways

*   A hostile takeover is when an acquiring company attempts to take over a target company against the wishes of the target company's management.
*   An acquiring company can achieve a hostile takeover by going directly to the target company's shareholders or fighting to replace its management.
*   Hostile takeovers may take place if a company believes a target is undervalued or when activist shareholders want changes in a company.
*   A tender offer and a proxy fight are two methods for achieving a hostile takeover.
*   Target companies can use certain defenses, such as a poison pill or a golden parachute, to ward off hostile takeovers.

![Hostile Takeover](https://www.investopedia.com/thmb/-pSKEEgjDn3ropLphRWuJgMpHO4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Hostile-Takeover-Final-18284f0c8dca4b4696feca038afcb61f.jpg)

*— Investopedia / Matthew Collins*

## Understanding Hostile Takeovers

A hostile takeover allows the new majority shareholder(s) to control the acquired business. The company being acquired in a hostile [takeover](https://www.investopedia.com/terms/t/takeover.asp) is called the target company, while the one executing the takeover is called the acquirer. Reasons that hostile takeovers occur, from the acquiring party's point of view, often coincide with those of any other acquisition or merger, such as:

*   A belief that a company may be significantly [undervalued](https://www.investopedia.com/terms/u/undervalued.asp)
*   A desire to access or own a company's brand, operations, technology, or industry foothold
*   A strategic move by [activist investors](https://www.investopedia.com/terms/a/activist-investor.asp) looking to effect change in a company's operations

Hostile takeovers are generally initiated in one of two ways:

*   A [tender offer](https://www.investopedia.com/terms/t/tenderoffer.asp) to [purchase the voting shares](https://www.investopedia.com/ask/answers/042215/what-happens-shares-company-has-been-object-hostile-takeover.asp) of another company [at a premium](https://www.investopedia.com/terms/a/at-a-premium.asp) above the [current market value](https://www.investopedia.com/terms/c/cmv.asp) (CMV)
*   In a [proxy](https://www.investopedia.com/terms/p/proxy.asp) fight, where the entity tries to persuade stockholders to vote out the current management and vote in management that would allow the takeover  
    

> **Important**
>
> The Williams Act of 1968 regulates tender offers and requires the disclosure of all-cash tender offers.

## Defenses Against a Hostile Takeover

To deter unwanted takeovers, companies may have preemptive defenses or employ reactive defenses to fight back. Some of these defenses are:

*   Differential voting rights
*   Employee stock ownership program
*   Crown jewel
*   Poison pill

### Differential Voting Rights (DVRs)

To protect against hostile takeovers, a company can establish stock with differential [voting rights](https://www.investopedia.com/terms/v/votingright.asp) (DVRs), where [some shares carry greater voting power](https://www.investopedia.com/terms/g/goldenshare.asp) than others. This can make it more difficult to generate the votes needed for a hostile takeover if management owns a large enough portion of shares with more voting power. Shares with less voting power can also pay a higher [dividend](https://www.investopedia.com/terms/d/dividend.asp), making them more attractive investments.

### Employee Stock Ownership Program (ESOP)

Establishing an [employee stock ownership program](https://www.investopedia.com/terms/e/esop.asp) (ESOP) involves using a tax-qualified plan in which employees own a substantial interest in the company. Employees may be more likely to vote with management. As such, this can be a successful defense.

However, such schemes have drawn scrutiny in the past. In some cases, courts have invalidated defensive ESOPs on the grounds that the plan was established for the benefit of management, not shareholders.

### Crown Jewel

In a crown jewel defense, a provision of the company's bylaws requires the sale of the most valuable assets if there is a hostile takeover, thereby making it less attractive as a takeover opportunity. This is often considered one of the last lines of defense.

### Poison Pill

This defense tactic is officially known as [a shareholder rights plan](https://www.investopedia.com/ask/answers/042015/why-shareholder-rights-plan-called-poison-pill.asp). It allows existing shareholders to buy newly-issued stock at a discount if one shareholder has bought more than a stipulated percentage of the stock, resulting in a dilution of the ownership interest of the acquiring company. The buyer who triggered the defense, usually the acquiring company, is excluded from the discount.

There are two types of poison pill defenses: the flip-in and flip-over.

A flip-in allows existing shareholders to buy new stock at a discount if someone accumulates a specified number of shares of the target company. The acquiring company is excluded from the sale, and its ownership interest becomes diluted.

A flip-over strategy allows the target company's shareholders to purchase the acquiring company's stock at a deeply discounted price if the takeover goes through, which punishes the acquiring company by diluting its equity.

The term poison pill is often used broadly to include a range of defenses, including issuing additional debt, which aims to make the target less attractive, and [stock options](https://www.investopedia.com/terms/s/stockoption.asp) to employees that vest upon a [merger](https://www.investopedia.com/terms/m/merger.asp).

### Other Strategies

Sometimes, a company's management will defend against unwanted hostile takeovers by using several controversial strategies, such as the people poison pill, a golden parachute, or the Pac-Man defense.

A [people poison pill](https://www.investopedia.com/terms/p/peoplepill.asp) provides for the resignation of key personnel in the case of a hostile takeover, while the [golden parachute](https://www.investopedia.com/terms/g/goldenparachute.asp) involves granting members of the target's executive team benefits (bonuses, severance pay, stock options, among others) if they are ever terminated as a result of a takeover. The [Pac-Man defense](https://www.investopedia.com/terms/p/pac-man-defense.asp) has the target company aggressively buy stock in the company attempting the takeover.

## Hostile Takeover Examples

A [hostile takeover](https://www.investopedia.com/ask/answers/042815/what-are-some-prominent-examples-hostile-takeovers.asp) can be a difficult and lengthy process, and attempts often end up unsuccessful. For example, billionaire activist investor Carl Icahn attempted three separate bids to acquire household goods giant Clorox in 2011, which rejected each one and introduced a new shareholder rights plan in its defense. The Clorox board even sidelined Icahn's proxy fight efforts, and the attempt ultimately ended in a few months with no takeover.

An example of a successful hostile takeover is that of pharmaceutical company Sanofi's ([SNY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=sny)) acquisition of Genzyme. Genzyme produced drugs for the treatment of rare genetic disorders, and Sanofi saw the company as a means to expand into a niche industry and broaden its product offering. After friendly takeover offers were unsuccessful as Genzyme rebuffed Sanofi's advances, Sanofi went directly to the shareholders, paid a premium for the shares, added in [contingent value rights](https://www.investopedia.com/terms/c/cvr.asp), and ended up acquiring Genzyme.

## How Is a Hostile Takeover Done?

The ways to take over another company include the tender offer, the proxy fight, and purchasing stock on the open market. A tender offer [requires a majority of the shareholders to accept](https://www.investopedia.com/terms/d/dragalongrights.asp). A proxy fight aims to replace a good portion of the target's uncooperative board members. An acquirer may also choose to simply buy enough company stock in the open market to take control.

## How Can Management Preempt a Hostile Takeover?

One of the ways to prevent hostile takeovers is to establish stocks with differential voting rights, like establishing a share class with fewer voting rights and a higher dividend. These shares become an attractive investment, making it harder to generate the votes needed for a hostile takeover, especially if management owns a majority of shares with more voting rights.

## What Is a Poison Pill?

A poison pill, which is officially known as a shareholder rights plan, is a common defense against a hostile takeover. It comes in various forms.

## What Are Other Defenses to a Hostile Takeover?

Companies can use the crown jewel, golden parachute, and Pac-Man strategies to defend themselves against hostile takeovers.

## The Bottom Line

A hostile takeover is where a party attempts to purchase a [controlling share of a company's voting stocks](https://www.investopedia.com/terms/b/blockholder.asp) or influences shareholders to vote out current management and replace them. Hostile takeovers happen because the acquiring party believes a company may be undervalued, or they want to access or own the company's brand, operations, technology, or industry foothold. It might also be a strategic move by [activist investors](https://www.investopedia.com/terms/a/activist-investor.asp) looking to effect change in a company's operations.

> **Article Sources**
>
> 1.  Federal Reserve Bank of St. Louis. "[Williams Act](https://fraser.stlouisfed.org/title/5900)," Pages 3–4.
>     
> 2.  LexisNexis. "[Employee Stock Ownership Plans in Corporate Transactions](https://polsinelli.gjassets.com/content/uploads/2022/02/employee-stock-ownership-plans-in-corporate-transa-1.pdf)." Page. 6-7.
>     
> 3.  The Clorox Company. "[The Clorox Company Adopts Stockholder Rights Plan](https://web.archive.org/web/20201021022602/https://investors.thecloroxcompany.com/investors/news-and-events/press-releases/press-release-details/2011/The-Clorox-Company-Adopts-Stockholder-Rights-Plan/default.aspx)."
>     
> 4.  PR Newswire. "[Sanofi-Aventis Completes Acquisition of Genzyme Corporation](https://www.prnewswire.com/news-releases/sanofi-aventis-completes-acquisition-of-genzyme-corporation-119496769.html)."