[citation needed] A "bear hug" is an unsolicited takeover bid which is so generous that the shareholders of the target company are very likely to submit, accepting the offer.
The party who initiates a hostile takeover bid approaches the shareholders directly, as opposed to seeking approval from officers or directors of the company.
[4] An acquiring company can also engage in a proxy fight, whereby it tries to persuade enough shareholders, usually a simple majority, to replace the management with a new one which will approve the takeover.
[4] Another method involves quietly purchasing enough stock on the open market, known as a creeping tender offer or dawn raid,[5] to effect a change in management.
[4] In the United States, a common defense tactic against hostile takeovers is to use section 16 of the Clayton Act to seek an injunction, arguing that section 7 of the act, which prohibits acquisitions where the effect may be substantially to lessen competition or to tend to create a monopoly, would be violated if the offeror acquired the target's stock.
Under Delaware law, boards must engage in defensive actions that are proportional to the hostile bidder's threat to the target company.
However, in the UK under AIM rules, a reverse takeover is an acquisition or acquisitions in a twelve-month period which for an AIM company would: An individual or organization, sometimes known as a corporate raider, can purchase a large fraction of the company's stock and, in doing so, get enough votes to replace the board of directors and the CEO.
With a new agreeable management team, the stock is, potentially, a much more attractive investment, which might result in a price rise and a profit for the corporate raider and the other shareholders.
However, as a breach of the Code brought such reputational damage and the possibility of exclusion from city services run by those institutions, it was regarded as binding.
In particular: The Rules Governing the Substantial Acquisition of Shares, which used to accompany the Code and which regulated the announcement of certain levels of shareholdings, have now been abolished, though similar provisions still exist in the Companies Act 1985.
For example, it is fairly easy for a top executive to reduce the price of their company's stock due to information asymmetry.
The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in off-balance-sheet transactions to make the company's profitability appear temporarily poorer, or simply promote and report severely conservative (i.e. pessimistic) estimates of future earnings.
(This is again due to information asymmetries since it is more common for top executives to do everything they can to window dress their company's earnings forecasts.)
[citation needed] A reduced share price makes a company an easier takeover target.
This can represent tens of billions of dollars (questionably) transferred from previous shareholders to the takeover artist.
The former top executive is then rewarded with a golden handshake for presiding over the fire sale that can sometimes be in the hundreds of millions of dollars for one or two years of work.
This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit from developing a reputation of being very generous to parting top executives.
Top executives often reap tremendous monetary benefits when a government owned or non-profit entity is sold to private hands.
In a sense, any government tax policy of allowing for deduction of interest expenses but not of dividends, has essentially provided a substantial subsidy to takeovers.