Most takeovers of companies are agreed by their respective boards of directors. A company will typically make an offer for all of the shares of another company, and ask its directors to recommend the offer to their shareholders. If the directors recommend the offer, and the shareholders agree with the price, the takeover will go ahead.
However, sometimes a company’s directors may feel that a takeover bid undervalues the shares, and so do not recommend the offer to shareholders. The bidding company could always drop the bid and walk away. But if it wants to press on, it can instead approach the shareholders directly and offer to buy their shares.
If the bidding company can buy up a controlling stake in the target company, it can then force the remaining shareholders to sell up, and thus take over the whole company.
The target company will often try to defend itself by promising to make shareholders better off with a new strategy. Very occasionally, it even tries to buy the bidding company – this is known as a ‘pac-man’ defence.