Financial Advisor Topics in Hostile Takeover Defenses: A Discussion of Fee Arrangements, Potential Conflicts and Inadequacy Opinions

– BNA Mergers & Acquisitions Law Report

The M&A market has continued to experience heightened hostile M&A activity. Despite an inherently high failure rate, hostile offers remain an option for acquisitive strategic companies as well as hedge funds and activist investors. Hostile M&A has been fueled by several factors, including challenges to organic growth faced by strategics in a weak economic environment, lower market valuations of targets relative to historical market highs, significant cash reserves held by would-be acquirers and access to available debt financing. In addition, the success of shareholder activism against takeover defenses has raised at least a perception of increased vulnerability.

Fortunately for targets and their boards, the process that should be undertaken in responding to a hostile takeover proposal is fairly well established. Perhaps first and foremost among the actions to be taken by the target is the retention of experienced legal and financial advisors to assist with evaluating the unsolicited proposal and to provide tactical advice. Most ''bulge bracket'' investment banks and top boutique financial advisory firms will have experience with hostile takeover defense. Targets will often hire more than one financial advisor.

This article will provide an overview of customary financial advisor fee arrangements for a takeover defense, followed by a discussion of potential conflicts in the hostile M&A context (with particular attention to concerns arising from a financial advisor's securities positions), and will then explore fundamental aspects of the inadequacy opinions that financial advisors are asked to provide when the board of a target publicly rejects a hostile bidder's offer.

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