Okay, I imagine that as a small business you probably haven’t faced a hostile takeover of your business by a rival or a group of interested investors or even your fellow shareholders. Yes, your shareholders can organize a takeover of your shares and do so successfully. It can be a very painful experience, especially if it’s a business you founded and nurtured as a startup.
In corporate finance, there are certain techniques that accountants use to mount a defense in the event of a takeover. Some of them have funny terms but have been used successfully in the past.
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A poison pill is a tool used by company executives who do not support a takeover bid. The tactic is to offer shareholders who are not involved in the takeover bid incentives to buy shares at a low price after a takeover bid closes. The effect being that the shareholder who takes over will see his shareholding diluted in due time. For example, your company is suddenly targeted by an investor who has convinced some shareholders to sell their shares to him by giving him a 40% stake in the company.
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If, however, in the past, there was a shareholders’ agreement that gave existing shareholders (before the new investor joined the company) a discount on the future sale of shares in the company. The effect of this is that it can dilute the 40% held by the investor and will now have to spend more to get back to 40%. A proposition that most hate to face.
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It is a question of modifying the constitutive act and the statutes of an association (MEMAT) in such a way as to make redemptions very difficult to carry out. For example, you can record in your MEMAT that before a takeover of a company can be completed, the shares sold by the willing sellers must represent up to 80% of the outstanding shares of the company. So if you own 30% of a company you started and your partners suddenly want to sell their shares to an investor you don’t like, this method simply prevents them from doing so. But remember, this only works if you’re able to show it’s listed in the company’s MEMAT.
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Although not entirely beneficial to shareholders, the Golden Parachutes are a set of clauses that ensure that any takeover bid involving the loss of jobs will require buyers to pay compensation to employees of the organization who may have lost their jobs due to the takeover. This is especially useful for companies whose employees are pioneers. A golden parachute provides them with good protection in the event of a takeover, which quite naturally triggers a change in management and key personnel.
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As the name suggests, a White Knight is a friendlier acquirer that a target company can approach to fend off a hostile acquirer. For example, your business may not deliver on its promises of improved returns, causing your partners to seek the sale of the business. They are now offering a buyer you hate for some reason. As the founder, you are against the deal and so to show that you have a better deal, you search for companies you prefer in the hope that they offer a better price.
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A Greenmail is an anti-takeover tactic used to block the purchase of your business from a hostile acquirer. For example, an investor went behind your back by acquiring shares of your partners, say for N2 per share. After finding out and with little or no option, you decide to approach the hostile acquirer asking him to buy back those shares at a premium. This is called a Greenmail. For this tactic to work, you need to be ready to play ball. Additionally, Greenmail can also be dangerous as it can cause other people to attack you, making you vulnerable to continue playing defense.
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As the name suggests, this is a counterattack tactic that involves a target company buying back the shares of its hostile acquirer. For example, an investor or a competitor gradually buys your shares in order to put together a bid to buy your business. As soon as you realize this, you decide to attack the acquirer by also buying shares in his company. This way, every attempt he makes on your business is neutralized by the attempts you make on him as well.
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Assuming you hold the patent for a program that your customers like to use. You’ve made so much money from it now that your partners think it’s time to move on and decide to sell their shares to a new investor at a premium. To deter them, simply sell the program since that is why your business is a target. Your shareholders may not like it, but if that’s the only option you have, then that’s it. You also need to be sure that you can redeem this program or have what it takes to create another cash-generating program.
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Sandbag is a system by which the management of a company deliberately delays the process of selling the company in the hope of finding a better deal. This of course works when you, as the primary stakeholder, are willing to commit to a better buyer.
People Pill is essentially a threat from management to jointly resign if the shareholders of the company agree to a takeover. This will work for you if your partners have no technical input into your business and just rely on you to generate revenue. The risk for them is that you are the main asset and once you quit, the company will go bankrupt.
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This article was first published on Nairametrics in August 2019.