The global market for cross-border and national mergers and acquisitions has been developing rapidly in recent years. The number and volume of mergers and acquisitions have increased significantly. And here Russia plays an important role. The recent surge in mergers and acquisitions, particularly in the Russian oil and gas sector, suggests that Russia, along with the United States, Japan, and Europe, is becoming an equal player in the corporate M&A market.
World practice shows that in most cases mergers and acquisitions are conducted by mutual consent of the top management staff of both companies. However, the practice of hostile mergers and acquisitions is not uncommon, when the management of the target company does not agree with the upcoming transaction and implements a number of anti-seizure measures. In this case, the organization that would like to acquire the company that interests it, appeals directly to its shareholders, bypassing the management team.
Global experience in protecting against hostile takeovers
In world practice, there is a whole system of anti-seizure measures that are used by both managers and shareholders in order to resist undesirable transactions. By their nature, all anti-seizure measures are divided into economic and legal ones. It is also possible to combine them when an economic measure is strengthened by a legal one (and Vice versa).
The main types of protection against unwanted absorption, as a general rule, are divided into those that are effective:
- before the public announcement of the intention to absorb the target company;
- after such an announcement.
Protecting a company before a public announcement of its takeover
Among the means of protecting a company from a takeover before a deal is publicly announced, the following measures are most commonly used in the global M&A market:
1. Amendments to the company’s Charter (Shark repellents)
These changes include the following:
- rotation of the Board of Directors: the Board is divided into several parts, with only one part elected each year;
- supermajority: approval of the merger by the supermajority of shareholders;
- fair price: restricts mergers to shareholders holding more than a certain share of outstanding shares, unless a fair price is paid (determined by a formula or appropriate valuation procedure);
2. Changing the place of registration of the company
Taking into account the difference in the legislation of individual regions, the place for registration is chosen, where it is easier to carry out anti-catch amendments to the Charter and facilitate judicial protection;
3. Poison pill
Such measures are used by the company in order to reduce its attractiveness to a potential invader. For example, existing shareholders are granted rights that, if a significant share is purchased by an invader, can be used to purchase the company’s ordinary shares at a low price-usually at half the market price;
4. Issue of shares with higher voting rights
The distribution of a new class of ordinary shares with higher voting rights allows managers of the target company to obtain a majority of votes without holding a larger share;
5. leveraged Buyout
The purchase of a company or its division by a group of private investors with high leverage. Shares of a company that is repurchased in this way are no longer sold freely on the stock market. If a group of investors is led by its managers when buying out a company, this transaction is called a company buyout by managers.
Protecting a company after a public announcement of its takeover
Among the means of protecting the company from takeover after the public announcement of the transaction, we note the following:
- Pac-Man defense – counter-attack on the invader’s shares;
- Legal proceedings are initiated against the invader for violation of antitrust or securities laws;
- Merge with the “white knight”. As a defense against the takeover, you can use the option of merging with a friendly company, which is usually called the “white knight”.
- Some companies offer a premium repurchase offer to a group of investors that threatens to take over, i.e. an offer for the company to repurchase its shares at a price higher than the market price (and also, usually, the price that the group paid for these shares);
- Conclusion of management contracts. Companies enter into management contracts with their management staff that provides high remuneration for the work of management. This serves as an effective means of increasing the price of the absorbed company since the cost of “golden parachutes” in this case increases significantly;
- Asset restructuring-purchase of assets that will not please the invader or create antitrust problems;
- Restructuring of obligations – issuing shares to a friendly third party or increasing the number of shareholders, buying shares at a premium from existing shareholders.
Other means of protection
The means of protection against hostile takeovers listed above are only a part of those used in the world practice. Others include the following:
- Macaroni defense. The target company issues a large number of bonds, which under the terms of the issue must be repaid ahead of time at a higher price in the event of a takeover of the company. Consequently, the cost of redeeming bonds increases when a takeover threat looms over the company (just as pasta swells during cooking), making the takeover excessively expensive;
- Scorched-earth policy. A method used by a target company to make itself less attractive to the customer. For example, it may agree to sell the most attractive parts of its business, called “crown jewels”, or set payment of all debts immediately after the merger;
- A target company sells a large number of its shares to a friendly company at a below-market price. This puts a potential ” taker “in a position where they will have to buy about the same number of shares, but at any inflated ” price, in order to take control of the company. This method helps the current management of the company to maintain its position;
- White squire – a broker that purchases fewer shares than in the controlling stake of the company.
The Russian practice of protection against hostile takeovers
The Russian practice of corporate mergers and acquisitions was formed against the background of an undeveloped legal framework in the field of corporate law and the absence of historically developed, evolutionary economic relations, which made hostile takeovers the most effective method of corporate strategy in Russia.
In fact, the methods of hostile takeovers and the corresponding protection measures applied in Russia at the initial stage of becoming a state have undergone certain changes only due to the development of corporate legislation. Solely in connection with this process, some of the tools used to protect against hostile takeovers can no longer be as effective as at the dawn of the Russian corporate market. As a result of new legislative changes, the anti-hostile takeover remedies used in Russia have ceased to be exclusively administrative in nature and are approaching those widely used around the world.
Below we will look at the most common economic and legal methods of resisting a potential invader in Russia, which are used by the management (shareholders) of a target company:
1. The Purchase of shares by companies owned by management, or the company’s purchase of its own shares, including their subsequent sale to own employees and management to increase the share of “insiders” to the detriment of external shareholders.
This strategy was widely adopted in Russia in the second half of the 1990s. an example is the actions of the management of some metallurgical enterprises;
2. Control over the register of shareholders, as well as restriction of access to or manipulation of the register of shareholders.
This method is effective for complex protection measures: its use without any additional means can not prevent absorption.
An example of such a complex tactic is the actions of one of the regional pharmaceutical companies. In the late 1990s, the company was attacked by the Moscow pharmaceutical holding, which intended to buy a controlling stake in the secondary market, but due to complex measures, which included strict control of the register of shareholders, the takeover did not take place;
3. Changing the size of the company’s authorized capital, in particular, purposefully reducing (“diluting”) the share of specific foreign shareholders by placing shares of new issues on preferential terms among the administration and employees, as well as friendly external and pseudo-external shareholders.
This method was used by almost all major companies in the oil and gas industry, primarily for the purpose of consolidation, creating the most manageable corporate structure. Thus, the risk of takeover is reduced due to the coordinated actions of all structural divisions of the company;
4. Involvement of local authorities to impose administrative restrictions on the activities of foreign intermediaries and companies that buy up employees’ shares.
One example is the refusal of one of the regional administrations to sell a stake in a budget-forming enterprise that was the target of an attack by a financial holding company and a large metallurgical plant;
5. Lawsuits to invalidate certain stock transactions supported by local authorities. A striking example of such tactics is the corporate war that has unfolded over Russia’s largest timber facilities.
Other means of protection
The list of anti-hostile takeover measures used in Russia is not limited to the measures described above; moreover, there are no restrictions on expanding the Arsenal of methods for both conducting a takeover and protecting against hostile corporate actions.
It is necessary to emphasize once again the Russian features of security measures-in addition to the measures already described, we will present a number of methods that are typical for Russian companies:
- Blackmail of local authorities by management if the company is budget-forming;
- Introduction of various material and administrative sanctions against employees-shareholders who intend to sell their shares to an “outside” buyer;
- Formation of dual power in the company (two General meetings, two boards of Directors, two General Directors);
- Withdrawal of assets or reorganization of the company with the allocation of liquid assets in separate structures, etc.
At this stage of development of the Russian market of corporate mergers and acquisitions, the national component is obvious, reflecting the peculiarities of the development of market relations in the country.
Most of the anti-hostile takeover remedies applied in Russia cannot be clearly qualified in accordance with the world’s recognized corporate takeover institutions since not only the range of means to gain control over a target company but also the means to protect against such a takeover do not fall under the standard criteria adopted in international practice. Nevertheless, we would like to note a shift in Russian corporate legislation. The shift is certainly positive.