Many private and ESOP-owned companies are now adopting private equity’s strategy of growing through acquisitions to remain successful. In order to offer career opportunities, increase revenue, and de-risk operations, companies are seeking to expand through acquisitions. However, this strategy also makes them more vulnerable to unsolicited offers, particularly in today’s robust M&A market. Responding to such offers can be a challenging decision for a company’s board, especially for ESOP companies who historically were rarely targeted for acquisition.
In recent times, there has been a significant increase in interest in evaluating and potentially acquiring ESOPs, especially by private equity firms. Companies are now more familiar with ESOP structures and employee ownership, making ESOPs more attractive acquisition targets. Factors such as private equity firms’ large amounts of available funds for acquisitions and the success of established ESOPs have contributed to this trend. As a result, ESOP boards must carefully consider how to respond to unsolicited offers in order to protect the interests of their shareholders.
When faced with an unsolicited offer, a company’s board is not obligated to respond positively right away. Critical factors that determine the seriousness of an offer include the adequacy of the consideration, fair deal terms, the buyer’s financial capability, and a sound acquisition rationale. Due to these exacting considerations, it is rare for an unsolicited buyer to meet all the requirements of a bona fide offer. Boards must follow a methodical evaluation process to determine the value and feasibility of any offer and engage legal and financial advisors to guide them through the decision-making process.
By engaging independent advisors and following a logical evaluation process, a board can assess the value and impact of an unsolicited offer on the company’s future. Legal and financial advisors can assist the board in navigating the various factors involved in evaluating an offer, including conducting market tests, valuations, and auction processes. If it is determined that the company can achieve its perceived value independently, the board has the option to reject the offer and maintain independence.
ESOP directors should inform their trustee of any potential offers once they decide to engage with a suitor, conduct a market test, or evaluate remaining independent. It is important for directors to balance their roles as members of the management team, employees, and ESOP participants to make decisions that benefit the ESOP shareholders. By understanding and following the necessary steps to respond to unsolicited offers, ESOP directors can generate significant shareholder value and make informed decisions that align with the company’s best interests.
