Recently, the Brazilian stock market received considerable attention due to a hostile takeover bid involving prominent players of the pharmaceutical industry. The case involved a takeover bid considered hostile by the targeted company and by some experts of the stock market, as the offered price per share was deemed below the target’s valuation, and the proposal to acquire control of the target company was made directly to shareholders, without prior negotiation with the company’s board. The offer was promptly retracted after rejection by the target, which also attributed its refusal to discrepancies between the organizational culture, corporate governance practices, and strategic growth objectives of the involved entities.
In Brazil, takeover bids (OPA in the Portuguese acronym) are subject to the provisions of Article 257 of the Brazilian Corporate Law (Law 6404/76) and the regulations set forth by Comissão de Valores Mobiliários (CVM), the Brazilian security and exchange commission, in Resolution 215/2024. A takeover bid, understood as a strategy to gain control of the target company by buying enough shares to have a majority voting stake in that company, can either be friendly or hostile. The latter, commonly referred to as “hostile takeover” in the United States, was initially imported and adapted from the US legislation for usage in the Brazilian capital market.
This type of acquisition, known as “hostile takeover”, typically aims at companies whose shares are suffering or failing in the stock market, entailing conflicts between shareholders and the company’s executives and directors, particularly when the cause for the shares’ devaluation is the Company’s inefficient management or the misalignment between the interests of the shareholders and the board. In such cases, for example, the hostile takeover may also happen without an actual bid or trade of the company’s shares, as the minority shareholders may seek an alliance to form a majority on the board of directors and gain control of the company’s management.
However, when there is an offer for acquisition of the company’s majority stake, such offer is deemed hostile when the target company’s board opposes the acquisition and, without prior consent or agreement between the bidder and the directors of the target company, the bidder goes directly to the shareholders, in an effort to gain control of the target company. Additionally, an offer is also deemed hostile if made at a time when the target company’s shares are failing or undervalued in the stock market. As the motivation behind the offer may vary, they are potentially driven by the desire of the bidder to gain market share, eliminate competitors or to obtain specific technology and/or know-how.
Though a hostile takeover is unlikely to succeed in companies that have a controlling shareholder or controlling block, since the controlling shareholder or shareholders have the ability to decide whether or not to sell their shares, in companies with wide groups of investors or diluted control, there are some defensive mechanisms that can be established to prevent a hostile takeover. These mechanisms are known as “poison pills”, which are provisions in the target company’s bylaws established to, among others, guarantee a “fair value” for the shares. For example, the shareholders can set a minimum price for the public offer to be accepted in the event of an acquisition of a certain stake of the company’s share capital.
Another strategy is commonly known as “white knight”, where the company seeks out a more advantageous offer – whether finance- or strategy-wise – from a third-party investor, to protect the interests of the target company and prevent the hostile bidder from gaining control.
Hostile takeovers, however, are typically successful when there is a desire to change the target company’s trajectory, whether by the minority shareholders, the company’s board or even an outlier investor. In such cases, a hostile takeover can facilitate transparency as the transaction is conducted within the regulated framework of the capital market, and can keep shareholders from suboptimal offers, such as a “bear hug”, for example, which is a hostile takeover approach where the bidder proposes a significantly higher price for the shares compared to the target company’s valuation, usually driven by competitive reasons, mergers, or to force a hostile transaction into a friendly takeover.
As illustrated, a hostile takeover often involves conflicting interests and circumstances because of the objections from the target company’s board, for financial reasons, when the target company’s shares are undervalued in the stock market, and even if the transaction is in the target company’s best interest. Thus, for either strategy to be effective, whether a hostile takeover or the poison pill, the parties involved must be supported by clear and assertive corporate documents, a structured governance, and specialized legal advisors who are able to assist them, while mediating and resolving conflicts, and accommodating the multiple interests involved.