The role of the financial executive in deterring hostile takeovers Hostile takeovers are not bad by definition, although management usually reacts as if they are. Assuming that the company's interests are served by repelling a takeover attempt, what planning must be done in advance and what can be achieved by different defensive strategies? Whether a hostile takeover attempt will be successful is greatly dependent on the defensive measures that have been implemented long before the tender offer is launched. There are a number of reasons why planning for hostile takeovers is especially important. In the first place, a tender offer typically expires in 20 business days. There is little time to start thinking about and implementing effective defensive strategies in 20 business days.
Second, the corporate law of Delaware and other states clearly favors defensive strategies that are implemented well in advance of a hostile takeover attempt. In the absence of a takeover attempt, courts generally apply the "business judgment rule," which is a presumption that in making decisions the directors of a corporation are acting on an informed basis, in good faith, and in the honest belief that the action taken is in the best interests of a corporation.
When a board of directors takes action designed to defeat or obstruct a specific takeover attempt, the question arises of whether the directors may be acting in their own self-interest, to entrench themselves in office, rather than in the best interests of the corporation and its shareholders. The courts place a higher burden of proof on the directors after a hostile takeover has been launched, requiring them to show that they had reasonable grounds for believing that a threat to corporate policy and effectiveness existed and requiring that the defensive measures be reasonable in relation to the threat posed.
The third reason why planning for hostile takeovers is important is that many effective defensive measures take substantial time and effort to put in place. For example, amendments to the articles of incorporation require a shareholders' meeting. Financing must be arranged for a corporate restructuring.
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