Company takeovers are exactly what they sound like – one company takes over another company. However, company takeovers are not always friendly; sometimes they can be hostile. In addition, there are many things to consider if you own shares in a company that is in the process of being taken over.
You might be wondering what happens to shares in a takeover. In this guide, you will learn everything you need to know about the process of a company takeover.
What are company takeovers?
A takeover occurs when one company (the acquiring company) gains control over another company (the target company) by purchasing enough shares to possess majority ownership. When an acquiring company has 50% or more ownership in a company, this means they can make decisions about the target company’s operations and finances as well as determine who has a seat on the board of directors.
How does a company takeover happen?
Company takeovers usually occur through a defined process. Normally, this is a takeover bid or a scheme of arrangement. Below is detailed information on each of these processes.
The acquiring company sends written offers to each shareholder at a specific bid price. Each shareholder can either accept or reject the offered price. The bidding can be done through a market or off-market (not using the share market). Most bid takeovers are off-market because conditions can be included in the bid.
Takeover bids are either friendly (the target company’s management wants to be taken over) or hostile (the target company’s management does not want to be taken over).
Scheme of arrangement
All shareholders vote on the offer to take over the company. Your shares are only acquired if the resolution is passed. The vote is a court-approved statutory arrangement that becomes bound by law. For this reason, a scheme of arrangement is only used for friendly acquisitions. In addition, they’re typically used when 100% of the target company is being acquired, as opposed to part.
How do I make a decision?
In a takeover or a scheme of arrangement, you should always take the time to process the information you’re given and make an informed decision as a shareholder. Here are some things to consider when you’re in the midst of your decision.
Review and understand the documentation
Once a takeover bid is announced, the acquiring company must make an offer to purchase your shares within 2 months. This is true for either friendly or hostile takeovers. You should read and understand the correspondence you receive from the target and acquiring companies before making a final decision.
When a scheme of arrangement takes place, the documentation will take longer to reach you, likely a few months. You will receive something called a scheme booklet from the company you own shares in. This documentation will describe the nature of the arrangement and will often include an independent report that determines whether the offer is fair and what your best interests are as a shareholder. Since schemes of arrangement are friendly in nature, you are likely to be told by the board of directors that the offer is fair.
Media coverage and stock exchanges
When a takeover bid or a scheme of arrangement is announced, the market can change rapidly. The price extended can increase or decrease, or the amount of time allocated for accepting the takeover bid may be extended.
While a takeover or scheme is going on, it’s wise to keep an eye on the media and check your email for updates on a bidder’s position. Also, stay up to date with stock exchange announcements because they could give you updates on the company takeover.
In addition to stock exchange announcements, you should also watch the share price. The current share price is a good indicator of whether the market thinks the takeover will be successful. Normally, when a company takeover is announced, the share price of the target company rises to around the level of the offer price. If the market anticipates a better offer in the future, the share price will rise above the price extended to you. On the other hand, if the market anticipates that the offer will be rejected, the share price will be less than the price offered to buy your shares. Finally, if the market price is close to the offer price and you are content with it, you can also sell your shares on the market before the offer from the acquiring company expires.
What happens when a scheme or a takeover bid is accepted?
Scheme of arrangement
If the scheme is approved by shareholders, this doesn’t mean you’ll be paid right away. The scheme still needs to be approved in a court of law before it can be implemented. In order for a scheme to be approved, more than 50% of the target shareholders voting on the resolution must be present at the scheme meeting or by proxy. Of those shareholders, 75% of them must vote in favour of the scheme of arrangement.
If you believe the bid is fair at the end of the offer period, you will sell your shares directly to the acquiring company without paying brokerage costs. What happens to shares in a takeover is they’re bought by the acquiring company and you will be paid in cash and/or new shares. This will be outlined in the takeover bid statement.
What happens if the takeover is rejected?
Scheme of arrangement
Since a scheme is a vote, it’s an all or nothing situation. If you vote against the scheme, but the majority voted in favour of the scheme and the court approves it, the scheme will move forward.
You are allowed to reject a takeover bid if you don’t believe it is fair, but if the acquiring company obtains 90% or more of the target company, they may be able to compulsorily acquire your shares on the terms offered under the bid. But if the acquiring company doesn’t reach the 90% threshold and still obtains majority interest, the market for your shares may be less liquid, which means they may be more challenging to sell in the future.
This also means the acquiring company will have control over the target company, so they are still able to influence the decisions the company makes, such as board appointments and dividend payouts. For this reason, it’s critical to understand what the acquiring company’s intentions are in regard to the company you own shares in because they might not be aligned with yours or other shareholders.
How do hostile takeovers work?
As a shareholder, you will receive correspondence from both sides of the battle in a hostile takeover.
The first piece of correspondence will come from the acquiring company. It will describe details of the offer. The second piece of correspondence will be a response from the management of the target company, which is also the company you own shares in. This correspondence will advise you to reject the offer.
Often the response from the target company will be backed by an independent valuation that will imply that the offer is undervaluing your shares significantly. Keep in mind that the valuator was hired by the company you own shares in, so the valuation will always reflect what management wants it to reflect. On the other hand, management and the board of directors always aim to act in the best interest of shareholders. If the target company doesn’t want to be taken over, there is likely a good reason.
If you, as a shareholder, find yourself in the middle of a hostile takeover, you should evaluate the correspondence from each side. From there, you can determine whether you want the takeover to occur or not.
Is it possible for a company to buy back its own shares?
An acquiring company isn’t the only entity that can make an offer to buy back your shares. The company you own shares in can make an offer to purchase back its shares in a process called a share buyback.
A company may decide to do this to increase the individual value of your shares by decreasing the number of shares available in the market or to reduce the administrative costs. In a takeover bid, you do have the option to refuse.
The company will notify you of their intentions and propose an offer to purchase back some or all of your shares. If you do decide to sell, you will not have to pay brokerage fees.
In some scenarios, as seen with a scheme of arrangement, a majority of shareholders may be required to approve the share buyback.
What are the tax implications of takeovers and share buybacks?
In Canada, shares are considered an asset. When you sell shares, either a capital gain or loss will arise. The capital gain or loss is calculated by taking the sale price and subtracting the original price you paid for the shares. If the number is negative, you have a capital loss. If the number is positive, you have a capital gain. On your personal tax return, you are required to report the capital gain or loss and pay tax on 50% of the amount. The rate of tax you pay depends on your tax bracket and the province/territory in which you reside.
If you are paid in cash under a scheme or a takeover, the process of calculating your capital gain or loss is relatively straightforward. However, if you’re paid in shares, the process is more complex.
The tax implications of a company takeover and share buybacks can be complicated to navigate on your own. It’s wise to hire professional help from an accountant or lawyer if you’re not sure what to report on your tax return.
Frequently asked questions
When a takeover comes into effect, your shares will be purchased by the acquiring company. You will be compensated in the form of new shares in the consolidated company or cash.
The formal hostile takeover definition is when an entity attempts to take control of another company without the cooperation or consent of the target company’s management or board of directors. In other words, a hostile takeover occurs when one company forcefully tries to take control of another company without them wanting to give up control.
Once the company you own shares in is officially bought, you will receive compensation in the form of cash and/or shares. If you are paid part or in whole for shares, these shares will replace the ones you previously owned.
Veronica Ott was a writer at Finder. She's written for numerous finance and business websites including Loans Canada, Borrowell and Fresh Start Finance. She previously worked as a professional chartered accountant in the private equity and advertising industries.
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