Anti-Takeover Defense (A,B,C)

Merger Agreement Provisions

Target may enter into agreement with friendly parties that provide them with certain benefits that give them incentive to participate Lockup option -Stock Lockup - under 20% they don't need shareholder approval -Asset Lockup - (Real Estate)

Historical Trend on Poison Pills

There is a downward trend

Do Target shareholders benefit from termination fee?

Yes! -Higher completion rates -Higher premium

The logic behind an anti-takeover defense (Guy -> girl example)

-Decrease the perception of intrinsic value of target to the attacker -Increase the price paid by the attacker

Impact on shareholder wealth

-Lower tobin's Q (Worse management ability) -Classified boards pay CEO more cash and stock options -Classified less likely to fire CEOs

Wealth effects of Poison Pills

-Markets react positively to adoption of poison pill if company's board has majority outside investors and negatively otherwise -Companies that adopt a plan are twice as likely to defeat an unsolicited offer -If a deal is accepted, premium is 5-10% higher. If deal is defeated, target stock price is down 14%

3 types of poison pills

1. First generation: preferred shares; adverse impact on balance sheet 2. Second generation: Flip-over rights; allow holders to buy stock in acquiring firm at a low price when the takeover is complete 3. Third Generation: Flip-in rights; allow holders to acquire stocks in the target firm (except the bidder)

Two Views on anti-takeover defense

1. Shareholder interest hypothesis 2. Management entrenchment hypothesis

Staggered Board

AKA Classified board In a staggered board, directors are grouped into several classes. Only a certain percentage will come up for election in a given year Benefits and costs of staggered board -board stability -Obstacle to takeover

Other changes to corporate charter

Antigreenmail provision change the state of incorporation -1209 North Orange, DE

Bidder Termination Fees

Bidder agrees to pay target a fee if the bidder dissolve he deal Reasons to withdraw? -Financing -Regulation Less common than target termination fee

Termination Fees

Break-up fee or topping fee Target termination fee - target agrees to pay the bidder if the target is taken over by another company (2-3% of purchase price) Motivation: -encourage bidder to participate in an expensive bidding war and compensate them for revealing information -discourage hostile bidder and protect sweetheart deal (White knights)

Historical Trend: Staggered Board losing appeal

Now majority of firms have non-classified boards Increasing pressure from active shareholders to dismantle staggered board

White Knight

Potential acquirer invited by the board to counter a hostile bidder What makes white knight favorable? -Higher offer price -More friendly deal terms

Anti-takeover defenses

Preventative measures (Prebid) -Staggered Boards -Poison Pills -Corporate Charter Amendments -Golden Parachutes Active Measures: -White Knight -Green mail -Crown Jewel

Other post-bid defense

Recapitalization Share Repurchase Corporate Restructuring Litigation

Poison Pills

Shareholder right Plan: grants holders of the company's shares the right to acquire additional shares at a deep discount to market is distributed to common shareholders as dividend (one right for each share of stock they own) The right is triggered if a shareholder accumulates an ownership position above a threshold DILUTE SHARES

How effective is a staggered Board?

companies with a staggered board are significantly more likely to defeat a bid