Could this hostile takeover scenario really happen?

General Questions
#1

In the book I’m reading (Omnitopia Dawn by Diane Duane), one of the characters, CEO of Company A, is attempting to effect a hostile takeover of another, rival Company B by a) waiting for the share price to drop precipitously, as he has reason to believe it will do, and b) at this point quietly buying up all the shares of company B (using a lot of intermediaries) until he has a majority voting bloc without Company A noticing (I assume this is the point of using the intermediaries, as the book implies he would be announcing it to the world after the takeover occurred).

This seemed odd to me, and in fact, a little bit of googling showed me that the Williams Act seems to make such a creeping tender offer impossible (because, if I understand this correctly, anyone trying to do this must file with the SEC first, thus making it hard for Company A not to notice). However, there were notes that because of changes in the structure of derivatives it is sometimes possible to get away with something this.

Could the scenario in the top paragraph, then, actually happen and result in a successful takeover? (And if so, is there a way to explain it to me in small words? :slight_smile: ) In the book, Company A is not always on the up-and-up with the law, so some illegality would be okay to assume, but obviously if the SEC is going to swoop in and declare it invalid that’s not going to be a successful takeover.

#2

Derivatives? Any derivative that gievs you effective voting control of a stock will count as a purchase of that much stock.

If company A arranges with intermediaries to combine to buy up (what’s the limit? 10%?) a significant share of company B, then they still must file a notice. The SEC is not stupid - this is the most elementary trick. If something like this happens by concerted action, then it’s conspiracy and all participants are equally guilty. The only thing stupider than losing any rights to participate in a listed company for an illegal takeover bid is being penalized because you helped someone else get rich. Even a hint that you acquired shares with the understanding you would sell them to someone else as part of a creeping takeover will earn you a serious fine and conviction from the SEC.

And then, when you are going to take a controlling interest, you have to make an offer to all the minority shareholders, IIRC.

If you want an interesting book, read “Barbarians at the Gate”. No need to take over under the radar. The trick is to find a company that for some reason is undervalued, and buy it out properly and formally. However, as in this book, it will trigger the interest of everyone else in the same game - usually resulting in a bidding war. (In RJR Nabisco’s case, the original offer started as $57/share and ended up about $109. If the original bid had won, it would have been a steal.)

#3

Thanks! This is exactly the kind of thing I wanted to know.

Okay, that’s what I thought. So the googled articles I was reading that said there was some sort of derivative-related loophole (which they never bothered to explain) must be referring to something extremely esoteric and not within the scope of the Duane novel, which I am thinking is just wrong.

I’ll check out the book you mentioned – that sounds a great deal more interesting than the novel I was reading :slight_smile:

#4

Most writers are not very knowledgeable about legal requirements, even when they affect the plot. Duane could argue, of course, that she’s writing fantasy, so has no need to assume that the same laws apply anyway.

In the real world, the CEO would certainly obtain legal advice in connection with his takeover. Assuming that these companies are reasonably large, there will be public scrutiny, so failing to comply with the law is not really an option. The purchase will have to be publicly disclosed on a Schedule 13D, which must be filed within 10 days after the CEO’s purchases make him beneficial owner of more than 5% of the class of securities. For what the CEO wants - a takeover - there is no point in playing around with derivatives.

The CEO will naturally try to get as large a toehold as possible. Once he crosses the 5% threshold, he presumably will buy rapidly over the next 10 days. It would be unusual but not completely impossible to accumulate a majority stake in that period.

Using intermediaries will not do anything to defeat the SEC reporting requirement. It might make it harder for market participants to determine who is doing the buying, prior to the 13D’s filing. However, they would certainly figure out that somebody is aggressively buying the shares.

There is the risk that the SEC indeed would consider this a creeping tender offer and require compliance with the tender offer rules. Since this is more of a judgment call, it’s realistic that the CEO might take this risk.

It is not necessary to make an offer to the minority shareholders. It is perfectly legal to leave them in place. However, it is not unusual to take steps to get rid of them, such as a squeeze-out merger, so that the acquirer will own the company outright.