I used to play Railroad Tycoon Deluxe (1993), the second video game in the groundbreaking Railroad Tycoon series. In the game, every player operates a railroad company (the default scenario is set in 19th century USA). Every railroad company has publicly traded shares. It is possible for one railroad company to take control of another railroad company by conducting a hostile stock market takeover. To conduct a hostile takeover, a company buys up >50% of the issued shares of the takeover target. To defend against hostile takeovers, a company buys up its own shares, creating treasury shares. Since control of a company depends on owning at least 50% of a company's issued shares, a company can immunize itself from hostile takeovers by buying up at least 50% of its own shares (this prevents anyone else from owning more than 50% of the company's issued shares).

Is this how it works in real life? Is a company immune from hostile takeovers when more than half of its issued shares are treasury shares?

  • You need control of a majority of voting shares. Treasury shares don't have votes. Nov 25 '21 at 14:14
  • @PeteBecker Was it different in 19th century USA?
    – Flux
    Nov 25 '21 at 14:14
  • Good question. I don't know. Also, in the US, this is a matter of state law, so it could have varied. These days, there's less room for robber barons to control everything. Nov 25 '21 at 14:16
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    How is this related to Personal Finance and Money? Nov 25 '21 at 20:23
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    @DilipSarwate This is related to financial literacy. News about mergers and acquisitions appear in mainstream media all the time. I also want to understand the potential for hostile takeovers, and the use of treasury shares for the stocks that I own.
    – Flux
    Nov 26 '21 at 6:17

A hostile takeover doesn't require ownership of a majority of the shares necessarily. It can happen by convincing a majority of the shareholders to agree to an acquisition that the current board opposes. It can happen by convincing a majority of shareholders to vote out the existing board of directors in favor of new board members who are more agreeable to the acquisition. And it can happen by acquiring enough seats on the board to force a change.

The 1968 Williams Act changed the rules of how takeovers can be executed, including mandatory disclosures and other procedures which makes the Railroad Era style takeovers all but impossible in the current environment.

Of course companies defending against hostile takeovers have all kinds of defenses which make it extremely difficult to pull off a takeover unless there already is extreme dissatisfaction with the management of the target company or the premium being offered is so high relative to the target's valuation that it is too rich for a majority of shareholders to pass up.

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