Hostile Takeover of Private Companies: Possibilities and Challenges

The process of hostile takeover, typically associated with public companies, represents a complex and often challenging endeavor in the realm of private companies. Contrary to popular belief, hostile takeovers are not a feasible option for private companies without the consent of the shareholders. Unlike public companies whose shares are traded on stock exchanges, private companies operate within a framework of stricter controls and agreements that render such attempts untenable.

Key Factors Hindering Hostile Takeovers in Private Companies

The primary obstacles to hostile takeovers in private companies can be attributed to several factors, including shareholder agreements and the nature of the company's structure.

Shareholder Agreements: Private companies typically have shareholder agreements that stipulate the rules and procedures for share transfers. These agreements usually require the approval of other shareholders before any sale can take place. Additionally, these agreements often include a right of first refusal, which means that if shares are being sold, the current shareholders have the right to purchase them before the sale is finalized with a third party. This mechanism ensures that existing shareholders maintain their stakes and control over the company. Broad Support Required: To successfully execute a takeover, one must persuade a majority of shareholders to accept the bid. This is often a significant hurdle, as the company's ownership is more concentrated, with key stakeholders already represented on the board. Therefore, a hostile takeover would likely require the defection of a substantial number of existing shareholders, which is rarely achievable in practice. No Public Shares: Hostile takeovers rely heavily on accessing the public market to acquire shares against the wishes of the company. However, private companies do not have publicly available shares, making such attempts impossible. While large companies can threaten to compete if the private company does not sell itself, this approach is limited to specific situations and industries.

Theoretical Possibilities, Yet Inpractical Solutions

While the idea of a hostile takeover is intriguing and could, in theory, be attempted, the practical implications are often insurmountable. For instance, consider the high-stakes situations involving platforms like TikTok and WeChat. These platforms are not technically companies but rather assets owned by media companies, making them even harder to take control of through a hostile means.

Unique Challenges

The challenges faced in attempting a hostile takeover of a private company extend beyond the legal and procedural aspects, encompassing several unique challenges:

Sparse Information: The availability of reliable information about private companies is typically limited compared to public companies. Hostile takeovers of public companies often rely on accessing public filings, financial statements, and other data that provides a comprehensive understanding of the company's financial health and business operations. Private companies, however, do not disclose such information, making it difficult to conduct the necessary due diligence. Dependence on Key Individuals: Private companies often rely heavily on senior individuals for their operations, which means that any change in the management could significantly impact the company's performance. Public companies, on the other hand, are generally larger and less dependent on individual leadership, which makes it easier to address changes in management. Concentrated Ownership: Ownership in private companies is more often concentrated and represented at the board level. The key metric to gain control is often 50%, and representation that reaches this threshold is often already present on the board. This leaves little room for unrepresented investors to challenge existing management, making it difficult to achieve a hostile takeover. Hostile Takeover Dynamics: Although the process may start hostile, it rarely remains so. Hostile takeovers often involve a quiet stake, followed by an offer letter to management, which can lead to a communications war and a proxy fight. In most cases, the parties either reach an agreement or the process falls apart. Only in rare circumstances do hostile takeovers progress to hostile boards, proxy fights, and hostile tender offers.

Conclusion

While the concept of a hostile takeover may be intriguing, the practical realities of the private company world render such attempts exceedingly challenging, if not impossible, without the consent of the existing shareholders. The unique structures, information asymmetries, and concentrated ownerships all contribute to making hostile takeovers a nonviable option in the world of private companies.