What is a Hostile Takeover?

Most founders dream of an exit. But not every exit is voluntary. A hostile takeover occurs when an acquiring company attempts to take control of a target company against the wishes of the target’s management and board of directors.

In a standard acquisition, both sides sit down and agree on a price. They agree that the merger makes sense. In a hostile scenario, the board says no. The acquirer decides that the answer is unacceptable and attempts to buy the company anyway.

This is a brutal mechanism of the free market. It highlights a specific reality that many first-time founders overlook. Once you take outside capital or go public, you work for the shareholders. If the shareholders think selling is a better idea than letting you keep running things, you might lose your company.

Since the acquirer cannot get the approval of the board, they have to go around them. They usually use two specific tactics to accomplish this.

The first is a Tender Offer.

The acquirer goes directly to the shareholders. They offer to buy shares at a specific price, which is usually significantly higher than the current market price. This puts pressure on the shareholders to sell to make a quick profit, bypassing the board’s strategic plans.

The second is a Proxy Fight.

Here, the acquirer attempts to persuade existing shareholders to use their proxy votes to install new board members. If the acquirer can replace the board with people who are sympathetic to the acquisition, the new board will approve the sale.

The outcome of both friendly and hostile deals is usually the same. One company owns the other. The difference lies in the process and the aftermath.

Friendly deals involve:

• Due diligence where both parties share private data.
• Negotiated terms regarding the future of the staff and culture.
• A smoother integration period.

Hostile deals involve:

• Public fighting and aggressive PR campaigns.
• Only public data availability for the acquirer.
• High turnover of management immediately after the deal closes.

In a friendly deal, you might stay on as a consultant or executive. In a hostile takeover, the current management is usually viewed as an obstacle to be removed.

You might think this only applies to massive public corporations. That is mostly true regarding the strict definition of a proxy fight. However, the logic applies to early-stage startups as well.

It comes down to control.

If you give up more than 50% of your voting rights to investors, you are technically vulnerable. While it is rare for VCs to force a “hostile” sale to another company in the early stages, they can force a leadership change or push for a premature exit if they control the board.

This forces you to ask difficult questions about your cap table.

Who actually owns the voting rights in your venture?

Are you structuring your board seats to protect your vision, or are you giving them away for capital?

Understanding the mechanics of a hostile takeover helps you understand the ultimate value of voting control. It is the only thing that allows you to say “no” when someone else wants to own what you built.