When posting a potential hostile bid to purchase an Ohio company, acquiring companies should take great care to avoid unintentionally triggering certain provisions of the Ohio Control Share Acquisition Statute and the Takeover Bid Statute. The triggering of these statutes may prevent the potential acquiror from being able to effectively carry out a tender offer as intended. When triggered, these statutes serve to slow down any acquisition and can serve to put a halt to a hostile tender offer.
The Ohio Revised Code (the "ORC") contains two separate statutes which serve to protect the existing management from hostile takeovers. These statutes are (i) the Control Share Acquisition Statute (Section 1701.831 of the ORC) and (ii) the Control Bid Statute (Section 1707.041 of the ORC).
The Control Share Acquisition Statute requires anyone who "proposes to acquire" more than 20% of an Ohio corporation (the "Target") with 50 or more shareholders to deliver a statement to the management of the Target stating that they intend to purchase a control share of the Target and including the terms of such proposed acquisition. Until this requirement is met, the acquiror may not purchase a control share of the Target.
The Control Bid Statute states that no offer to purchase equity securities of a Target from any Ohio resident may be made by an offeror without the offeror first filing certain information (including prospectuses, brochures and other offering materials, information about the offeror, and intentions for what the offeror intends to do with the Target) about the offer with the Ohio Division of Securities (the "ODS") if the offeror would own more than 10% of the Target after the purchase of the securities. The ODS then reviews the filing, and may or may not approve the request to make a control bid.
How the Statutes May Be Triggered by a Bear Hug Letter
Both of these statutes may be unintentionally triggered by a "bear hug letter" (that is, a letter sent to the management of the Target stating the intent to purchase a large number of shares of the Target's stock which is designed to force the management of Target into dealing with the potential acquiror).
Under the Control Bid Statute, a "control bid" is defined as merely an "offer to purchase any equity security of [Target]" from an Ohio resident. Although "proposes to acquire" is not defined, in the Control Share Acquisition Statute, the language is open to a very broad interpretation. Therefore, any language even hinting at offering to purchase securities could well be construed to be both an offer to purchase equity securities as well as a proposal to acquire a control share.
In the event that the original bear hug letter does not have the effect of coercing management of the Target to behave in the way that the potential acquiror hopes, potential acquirors sometimes publish bear hug letters, or otherwise make publicly known their desire to purchase the Target. The offeror must especially be careful about the language in any public statement it makes, whether it simply publishes the bear hug letter, or whether it releases a different statement. In the event that any public release is considered an offer to purchase or a control bid, the release will have unwittingly triggered and violated the Control Share Acquisition Statute and the Control Bid Statute.
Effects of Triggering the Statutes
If the bear hug letter is found to trigger either statute, the offeror's ability to conduct the offering as it originally intended will be severely compromised. Triggering the Control Share Acquisition Act requires that certain procedures be followed, the failure of which can lead to a temporary restraining order, which would hold up the offer until the requirements set forth in the statute are met. Worse, if the Control Bid Statute is considered to be triggered by the bear hug letter, the offeror will be deemed to have violated the statute, as the offeror will not have made the requisite filing with the ODS before announcing the tender offer. Until the violation is corrected, the offeror will not be able to purchase any securities of the Target. At that point, at the very least, the offeror must then hastily make the filing, and hope that the ODS does not suspend the offer. In its discretion, the ODS may (i) suspend the offer and request that the offeror provide more information to the offerees and (ii) hold a hearing to determine whether the offer may be resumed.
Therefore, those considering making a potential hostile to purchase an Ohio company with the possible intention of making a tender offer to the shareholders of the Target should take great caution in the language they use in any letter they send to the Target. Any language that may be construed as offering to purchase securities from the shareholders of the company should not be used. It is strongly advised that Ohio counsel be hired to review the language of any such letter before it is sent to the management of the Target and especially before any public statement is made.