Acquisition Company Bear Hug Letter

Summary

This bear hug letter template is intended for use by acquisition companies approaching a target to commence an unsolicited acquisition. This template contains practical guidance and drafting notes. For a broad collection of content related to hostile takeovers and shareholder activism, see Hostile Takeovers & Shareholder Activism Resource Kit. For strategic investor bear hug letters, see Strategic Investor Bear Hug Letter. Approaching the Target Acquirers may approach target companies about potential acquisitions casually and privately or formally and publicly. Casual approaches may occur in discussions at the senior executive or director level in prearranged meetings or during impromptu meetings at an industry gathering or otherwise. Bear hugs are formal approaches from acquirers to targets regarding a potential acquisition in the form of a letter to the board of directors and chief executive of a target corporation. Bear hug letters may be sent privately (i.e., without the acquirer publicly announcing that a letter has been sent regarding a proposed transaction) or they may be sent publicly (i.e., with a contemporaneous (or soon thereafter) public announcement by the acquirer that a letter has been sent regarding a proposed transaction). The letters may propose a specific transaction (e.g., a cash, stock-for-stock or part cash/part stock merger at a specified price) or they may propose a transaction without a specific form or price). When advising the acquirer, make sure your client is familiar with the anti-takeover protections in the target's organizational documents as well as any relevant business combination, control share or other anti-takeover provisions under applicable state law. Pros and Cons of Public vs Private Bear Hug Letters Public letters with firm price proposals are sometimes referred to as "grizzly bear hugs". These letters are more aggressive than private letters and work to place public pressure on the target's directors and officers to respond to the proposal. However, by making its interest in target public, an acquirer may invite competing proposals to acquire target. In addition, public disclosure may have an impact in trading of the target's stock and impact target's share price. Private letters with or without firm price proposals are sometimes referred to as "teddy-bear hugs". They are typically sent with the goal of getting the target to engage in negotiations with the acquirer. One advantage of a private bear hug letter is that, by keeping acquirer's interest in target confidential, it can afford an acquirer an opportunity to engage in exclusive negotiations with target without encouraging competing bids. Content of Bear Hug Letter The contents of bear hug letters differ depending on a number of factors. Non-strategic acquirers will typically make references to their other acquisition successes and provide background on who they are and their capabilities to consummate a transaction. Often, they also attempt to assure a target that they are not short-term investors and that they are seeking long term benefits for themselves and their fellow investors. If an acquirer's stock is offered as consideration, the letter will typically make references to the value of the acquirer's stock. If cash consideration is offered, acquirers will typically state whether or not their offers are subject to financing. Drafting Considerations Typically, the letter will make references to taking further actions if no response is received. If the acquirer intends to make its proposal public, it will typically make that clear in the letter. Even where the intention of an acquirer to make its interest public is not expressly made in its letter, the threat of public disclosure is often implicit and works to get targets to respond to an acquirer's proposal. Offers are usually subject to due diligence, and, of course, execution of definitive transaction documents. References to these two factors are usually made in some manner. Finally, when specific offers are made, there is typically a statement regarding the size of the premium to current market value the proposed offer represents. In these unsolicited proposals, the premiums are typically significant enough to get the attention of the target's board and its shareholders. Target Board's Response A board has no absolute duty to respond to all bear hugs; however, targets may publicly respond to public letters for public relations purposes even if the response is "no". Of course, boards do have a duty to consider the bear hug with a view towards shareholders' best interests and will always review the proposals whether or not a formal or informal, public or private response is provided. In responding to a bear hug letter, a target will need to make sure the board is informed and involved at every step of the process. A target should also engage professional advisers with experience in mergers and acquisitions, including contests for control. With the assistance of these professional advisers and its board, the target can determine how to most effectively respond to a bear hug letter and deliver a consistent message to the public regarding the proposal and its response thereto. In advance of receipt of an unsolicited offer or proposal, a target should evaluate its takeover defense mechanisms on an ongoing basis to afford itself a chance to protect itself when a takeover proposal is issued. Issues for Target Board to Consider With respect to the specifics of a bidder's proposal, a target should consider whether to publicly disclose that an unsolicited indication of interest or offer has been made. A decision to publicly disclose receipt of a bear hug letter will likely impact the target's share price and potentially attract interest from other interested parties. Next, a target should determine whether or not a sale of the target and/or engaging in discussions regarding such a sale is in the current best interests of the target. If the bidder offers a low price or there are other reasons that it is in the best interests of the target not to pursue discussions regarding a sale at such time, then a target may decide to decline overtures from a bidder to engage in such discussions. In addition, the target should determine whether the bidder is serious about and prepared to consummate a transaction. For example, how quickly can the bidder complete confirmatory due diligence? Has the bidder engaged advisers for a transaction and does it have a plan with respect to obtaining the requisite approvals for a transaction. A target should also consider whether to grant exclusivity to the bidder. If the price offered to target is attractive or it is unlikely that competing proposals will deliver greater shareholder value, it may make sense to grant exclusivity to the bidder for at least a short period of time.