Hostile Corporate Takeovers

Updated: Feb 20

Brookfield Infrastructure Partners Hostile Bid for Inter Pipeline Ltd.

A hostile takeover is an acquisition of a Target company in which Acquirer directly approaches the shareholders of the Target company to get the acquisition approved or to replace the Management team. In such cases, board of directors of the Target company has rejected the offer. A tender offer or a proxy fight are the typical two methods for execution of a Hostile Bid. In a hostile takeover, Target company share prices increase on the announcement of the hostile bid more than in a friendly merger. In response to the hostile takeover, Target company can use several defenses including:

- A Shareholders’ Right Plan: this is a poison pill strategy in which the plan allows the existing shareholders of the Target company to purchase shares at a significant discount to the market price, thereby diluting the ownership of the Acquirer and making it quite costly to takeover the Target. This approach also buys the board of directors time to find other alternatives or strategic partners.

- A Voting Rights Plan: this is a clause added to the Target company’s charter by the board of directors. This clause restricts the voting rights of the existing shareholders who own a predetermined percentage of Target shares from voting on certain issues. Consequently, Management can prevent Acquirers from voting on the acceptance or rejection of transactions or takeovers. Under the Voting Rights Plan, Management can change the majority percentage of votes required for approval of mergers and increase the percentage of approval required, making it impossible for Acquirers to takeover the company.

- A Staggard Board of Directors: this approach makes it quite time consuming for Acquirers to replace the Target’s board of directors through a proxy fight. In such case, directors of the Target board are elected at different times for multi year periods and not all at the same time.

- Greenmail: in this case the Target purchases its own shares at a premium from corporate raiders to prevent the takeover.

- White Knight or Strategic Partner: this strategy allows the Target to sell the company to a friendly bidder who will keep the Management in place and provides shareholders with a better offer price and alternatives. This approach is generally the last resort once the Management has run out of options; however, if the combined value of the merged entities and financial and operating performance is not accretive to the Acquirer and fails to achieve the anticipated benefits, this approach could fail.

- Increasing Debt: Management of Target can intentionally increase the debt burden on company’s balance sheet to ward off the corporate raiders. This creates concerns with respect to the financial viability of the company post acquisition and its inability to meet large debt obligations. Over the long term, this strategy could hurt the existing shareholders of the Target as it directly impacts Target’s share price in the public markets.

- Acquiring Other Companies: Management can acquire other companies through a combination of stock, cash or debt and thereby dilute the ownership of corporate raiders. A suitable strategic acquisition at the right price can also benefit shareholders through realization of synergies.

- Acquiring the Acquirer: Target company can make its own bid to acquire the Acquirer. This approach is rarely successful and to the detriment of shareholders due to the increased level of debt, potential dividend decrease and drop in share price.

- Triggered Option Vesting: under this approach the board of directors add certain clauses to the corporate charter that in the event of acquisition of the company or change of control, all unvested options become vested and paid for by the Acquiring company, hence making it expensive for the corporate raiders to take over the Target as they have to meet the large expense associated with vested options.

Brookfield Infrastructure Partners Hostile Bid for Inter Pipeline Ltd.

The following is an overview of Inter Pipeline Ltd. Hostile Takeover by Brookfield Infrastructure Partners L.P. in 2021, post 2020 oil market crash and global COVID-19 pandemic. Take Over Defenses implemented by Inter Pipeline to ward off Brookfield Infrastructure is further discussed.