Your CEO calls you, as the general counsel of a public company, to tell you that a third party has made an unsolicited offer for the company. What are the first steps you should take?
Types of Unsolicited Proposals. An unsolicited proposal may be a casual pass, where a third party informally approaches the company to discuss an acquisition proposal, or may be a bear hug letter, which will contain a formal proposal to buy the company and may include a price. Bear hug letters put immediate pressure on the company’s board to consider the proposal or look into defenses and strategic alternatives. The potential acquiror may choose to disclose the bear hug letter.
What Kind of Initial Response is Required? Generally, the company has no duty to discuss, negotiate, or meet with the potential acquiror to disclose the proposal. Possible responses include:
- If the CEO is contacted, he or she may indicate that the company is not for sale and that it plans to remain independent (provided that is the position approved by the board).
- If the board has not approved a response to an acquisition proposal, the CEO should say that the board will discuss the proposal at its next meeting.
- If the offer has been publicly announced, the CEO may consider saying, “We will call you back.”
- If a director is contacted, the call should be referred to the CEO in accordance with the company’s sole spokesperson policy.
When Might a Company Want to Publicly Respond? Although in many cases the company will not be required to publicly disclose and respond to the proposal or offer, the company may decide for strategic reasons to do so, especially if the potential acquiror may try to use the company’s nondisclosure to its detriment. For example, if the potential acquiror sent several letters asking to discuss an acquisition and the company never responded or disclosed the letters, in a subsequent proxy contest, the potential acquiror could emphasize that the company was not even willing to acknowledge or consider the proposals and question whether the board is acting in the best interest of the stockholders.
What Should the Company do in the Meantime? First, the company should consider the timing of the inquiry in relation to the company’s business and activities at the time. For example, the threat of a proxy contest is much greater when the proposal comes shortly before the advance notice deadline for director nominations in connection with the company’s annual meeting to elect directors. The company should review all upcoming deadlines for nominations and shareholder proposals under the bylaws and Rule 14a‑8.
Second, the company must review any antitakeover defenses currently in place and consider adopting new ones. Standard antitakeover provisions include:
- Poison pill;
- Staggered board;
- Prohibition of stockholder action by written consent;
- Advance notice for director nominations and stockholder proposals;
- Director qualifications codified in the company’s bylaws;
- Limitation on ability to call special stockholder meetings;
- Director removal only for cause;
- Ability of board to fill director vacancies;
- Ability of board to issue blank check preferred stock;
- State business combination statutes;
- Supermajority voting provisions; and
- Change of control puts in indentures or other acceleration provisions in a bank loan or other debt.
Third, the company should review its stockholder base, especially institutional and other large holders, to ascertain those stockholders that are likely to support the company.
Fourth, the board may determine to hold a special meeting to consider the proposal. At the special meeting, management, financial advisors and legal counsel should give presentations that provide the board information on its fiduciary duties in connection with responding to the offer, the adequacy of the offer, strategic alternatives, antitakeover defenses and whether a special committee is necessary.
Finally, if it becomes apparent that the inquiry will turn into a hostile takeover attempt, there will be additional steps that the company should take in preparation.