Anti-Takeover Defense

What are the three generations of the poison pill and why did companies start using less of the first two generations?

First, preferred shares. Issue with fixed dividends. Second, flip over rights. Only allows you to dilute after acquisition takes place. More of a deterrence. Third, flip in rights. Allows firm to issue shares to existing shareholders and dilute values of buyer as the acquisition is occurring.

What impacts do classified boards have on shareholder wealth?

They are more likely to increased CEO pay and less likely to fire a CEO. So may lead to agency problems.

What are the effects of poison pills on shareholder values?

They increase shareholder wealth by increasing takeover premiums.

What is greenmail?

When a target will offer to buy back its own shares from the buyer who has bought on the open market.

Do shareholders benefit from termination fees?

Yes, it typically leads to a higher premium and makes deals more likely to be acquired.

Are classified boards effective?

Yes, they are very effective at dealing with corporate raiders in proxy contests and tender offers.

What sort of companies are more likely to have dual-class structures?

"Strong founder" tech companies.

What is a White Knight?

A potential buyer invited by the board to fend off a hostile buyer.

Why might a White Knight bother with a company?

Board may offer the WK greater transparency, the board may offer break-up fees, the board may offer lock-up options.

What is the dominant form of anti-takeover defense in the US now?

Dual-class voting structure.

How does a poison pill work?

If a hostile shareholder acquires a certain percentage of the firm's shares the firm can issue the option for new shares to existing shareholders but not to the hostile shareholder. Comes in the form of a special dividend. This has the effect of diluting the buyer's shares.

Why would the board have to offer a WK lock up options?

In case the target is acquired by another 3rd party, the WK has not wasted its time.

Do most companies have classified boards?

No, before 2000 they used to have more classified boards.

What are active capital structure changes that a firm can do to deter takeover.

Pay out special dividends, buy back shares, take on debt.

What is the reasoning behind a classified board?

Provides board stability and makes it longer for raiders to take control of a board. Most raiders will not want to wait long to take over a board.

What forms of poison pills do US firms currently use? Why were poison pills in general phased out?

Second and third generation. They were seen as "bad" corporate governance methods.

What are two views on how anti-takeover defense impacts shareholder value?

Shareholder Interests Hypo: Protects from corporate raiders. Mgmt Entrenchment Hypo: If fences are too high then mgmt becomes untouchable.