united-states securities
Is this a legal way to make money or buy an entire company?
<p>A hypothetical very wealthy investor (which could be a large public traded company) feels that the XYZ stock is undervalued. The investor buys about 4% of the company. He then offers to buy the whole company for a 25% premium. He would be happy to buy the company at that price. The management of XYZ would like a higher price but the investor is not offering a higher price so the XYZ company attempts to find another buyer for the company at a higher price. If they succeed, the investor is happy because he made a nice short term profit. If they fail, he gets the company at a price he wants.</p>
<p>Is there any legal issues using this approach?</p>

<p>This is very likely to be legal.</p>
<p>The devil is in the details (there are lots of forms that are expensive to have lawyers prepare that you have to file with the Securities and Exchange Commission to carry out this plan and the transaction may need to pass anti-trust review and media ownership consolidation requirements to pass muster, for example).</p>
<p>But this is pretty much the standard arrangement in a hostile takeover of a publicly held company (except that usually the offer is limited to a majority of the shares outstanding, or whatever percentage is necessary to secure control, rather than all of the outstanding shares of the company, and usually the control premium is a little larger than 26%).</p>
<p>In practical reality, the Board will often have put in place a variety of legal measures, sometimes called &quot;poison pills&quot; to allow it to discourage tender offers (which is what these are called) when faced with bidders that management doesn't like, which can be waived for bidders that management does like, and  this frequently results in litigation under an expansive and involved body of state corporate like in the Delaware Chancery Court in most cases. But those steps are more often speed bumps than deal killers in these kinds of transactions.</p>
<p>The way this plays out in a privately held company, where there is frequently a shareholder's agreement restricting transfers, would be quite different. But the question appears to contemplate a publicly held company scenario/.</p>
<p>Also, in practice, even an extremely wealthy investor couldn't afford to make a purchase like that without financial institution support (often in the form of corporate bonds in what is called a &quot;leverage buy out&quot;), or a &quot;committee&quot; of wealthy investors working together. But again, the source of financing doesn't seem to be the main point of this question.</p>

<h2>You’ve pretty much described how takeover offers work</h2>
<p>Different jurisdictions have different laws to the specifics but they all involve the investor making an offer, the directors recommending or not recommending the offer to the shareholders and the shareholders accepting or rejecting the offer.</p>
<p>A good board should always be looking for potential buyers who can maximise shareholder value - that’s what they are there for. A takeover offer against the wishes of the board is called a “hostile” takeover and many jurisdictions have rules about how and when they can (or must) be made. A victim board may very well seek alternative buyers if they feel that is in the best interests of the shareholders.</p>
<p>The risk for the investor is that their bid might fail, the alternative bid (if any) might fail and the shares fall back to a price lower than the original.</p>
<p>In <a href="/questions/tagged/australia" class="post-tag" title="show questions tagged &#39;australia&#39;" rel="tag">australia</a>, it is <a href="https://www.ashurst.com/en/news-and-insights/legal-updates/takeovers-in-australia/" rel="nofollow noreferrer">prohibited</a> (with exceptions) to control (not necessarily own) 20% of the voting stock of a public company or listed unit trust <em>unless</em> you launch a formal takeover offer to buy <em>all</em> the shares/units. The board will either endorse or reject the offer to the shareholders. Each shareholder is free to accept or reject the offer (noting that the bid may be conditional on e.g. the offerer getting a certain stake). If they acquire more than 90% (and at least 75% of the shares they didn’t own before) they can compulsorily acquire the rest.</p>
