Corporate Finance

Pre-Offer Defense Takeover Mechanisms

A company may set up preemptive defense mechanisms in order to help ensure that it remains independent or to increase its purchase price.

Rights Based Defenses: These are shareholder actions that can be taken to make the company less attractive to a would-be acquirer.

  • Poison Pills: Trigger the issuance of target company stock at a discounted price to dilute earnings.

  • Flip-in Pill: Target company shareholders can buy stock at a discount, once one share owner crosses a specific ownership threshold.

  • Flip-over Pill: Target company shareholders can buy the acquirer’s stock at a discount from the market price.

  • Shark Repellants: Can change the target’s corporate charter with no action from shareholders, in order to fend off a hostile acquirer.

  • Strategic Incorporation Location: In some jurisdictions it may be easier to resist hostile takeovers, so companies may select one of these locales for incorporation.

  • Staggering Board Terms: While considered less than optimal from a corporate governance standpoint, staggered board elections can increase the amount of time takes a would-be acquirer to get board representation.

  • Golden Parachutes: Offer payouts to pre-merger executives if they depart following the change in control.  Arguably a weak defense, given that the acquiring firm may be fully prepared to pay up in order to remove the existing management team.

  • Fair Price Amendments: Sets a price floor for the would be acquired firm’s shares.

  • Supermajority Provisions: Requires a shareholder vote approving the merger well above a 51% simple majority in order for the takeover to be allowed.

  • Voting Rights Restrictions: Requires a large shareholder to obtain board permission to vote once a certain ownership threshold has been crossed.

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