Target Defenses / Poison Pills
Supermajority Vote - Focus
Focus is on preventing back end mergers and freeze out It erects a barrier to the second step merger
Redemption Provision - Window Redemption
Gives the BOD the ability to redeem rights for a specified period of time following the issuance of rights
Poison Pill - Voting Plans
Gives the preferred shares the right to vote But denied that right to bidders who acquire more than a specified amount of stock
Stock Repurchase - Goals
The goal is to support the company's stock price by lowering number of shares and acting as a signal that managers care about SHs High stock price is the best takeover defense
Why Redemption Provisions are needed?
They allow the BOD to continue to negotiate for a friendly acquisition
Redemption of Poison Pills
This defeats Goldsmith strategy But then there is issue where bidder can condition tender offer on redemption of the plan But then SHs are furious because that takes away their ability to buy more shares for cheap
Flip in Pill
This stops Goldsmith strategy If triggered, the flip in entitled the holder of each right, except for the acquirer to buy shares of the target stock at half price This dilutes the target ownership Typical trigger is 20% acquisition
Lenox Poison Pill
This was the first one As a special dividend it issued nonvoting preferred stock Therefore, if Lenox was acquired, this would kick in and dilute the holdings
Supermajority Vote - Generally
Typically formualte that 80% of outstanding shares and a majority of shares owned by the bidder approve the merger Also often have provision that the requirement can only be deleted by a supermajority vote
Typical Poison Pill
Upon triggering event, allow existing SHs to acquire their own stock for a cheap discount, typically 50% This allows them to buy up shares and dilute ownership
Fair Price Variant - General
Variant of supermajority Exempts transaction from supermajority vote when price to be paid exceeds a certain amount Usually this requires that the first and second step be paid the same with the same consideration
Flip Over Plan
When triggering event occurs, the holder of each right becomes entitles to purchase common stock of the acquiring company, typically at half price Dilutes ownership
Classified Boards - DGCL
Allows classified BOD to be created through articles or bylaws Only SHs have power to amend bylaws unless the articles give power to the BOD But BOD cannot divest SHs of that power, so concurrent powers
Compulsory Redemption Provisions
Allows minority SHs to demand to be bought out at a price at least equal to the price paid in the first step
Shark Repellant
An amendment to a firm's articles of incorporation or bylaws to persuade potential bidders to look elsewhere
Friendly Stock Repurchase
Another option is to have a friendly buyer purchase the stock to keep it as voting share rather than treasury stock
Redemption Provision - Weaknsses
Bidder can trigger the pill, win the proxy contest, then redeem the pill once on the BOD
Classified Boar - MCBA
Classified BOD only created through the articles Allows directors to amend bylaws unless: 1. The articles give that power solely to SHs OR 2. The SHs amend the bylaws an provide that directors cannot thereafter amend the, So big here that SHs hold control
Dual Class Stock - General
Create two classes of stock A and B Class A - regular common stock, one vote per share Class B - Nontransferable unless converted into class A first, has large number of votes per share, typically 10
Dead Hand Pill
Deprives newly elected directors the power to redeem the pill Can only be redeemed by those directors who were in officer when the pill became exercisable
Goldsmith Takeover
Exposed first generation pills the Crown pill kicked in if bidder tried to enforce freeze out Gold bought Crown, but did not freeze out minorities Then Gold avoided the pill, but it still existed so no one could take them over, which meant a white knight could not come in and drive up price This worked because the Crown pill was non-redeemable
No Hand Pill
Has provision making it non-redeemable for 6 months after a change in control of the BOD Less effective than dead hand, because it can just be waited out
Stock Lockup Option - Recovering cost
If potential acquirer loses but exercises this, they can then sell the stock to recover some of their sunk costs from failed acquisition
Defensive Acquisitions
In old days, targets tried to acquire companies that caused anti-trust issues which made them unattractive to bidders This backfires, hurts company, lowers price, then more likely to be taken over
Most Common Takeover Defense
Litigation is far and away the most common Typically it is a violation of some rule, especially tender offer rules
Combining Poison Pill with Staggered BOD
Really strong deterrent Pill further dilutes shares, giving the acquirer a hard time swaying the vote
Stock Repurchase - Issues
Securities fraud liability Company cannot purchase shares if they are in possession of material non-public information
Dual Class Stock - Operation
Since Class B nontransferable, SHs must convert to A to sell So overtime, the only people with class B are those who held for a long time This is often management, who then can hoard Class B stock, giving them huge voting rights They continually acquire more Class B as it is given out as a dividend for Class B
Classified Boards - General
Staggered boards Divide the BOD into three classes where each class is elected annually Forced offeror to go through two annual cycles to gain control of the majority of the BOD
Poison Pill - Back End Plan
Target SHs get rights package when triggered They then can exchange this right for a package of target's shares valued at the present minimum value of the corp This then establishes a minimum takeover price
Redemption Provision - White Knight Provisions
Target can redeem rights in connection with a transaction approved by the directors Allows a white knight to come in
Poison Pill - Poison Debt
Target issues bonds that forbid acquirers form putting the target into further debt and usually forbid them from selling target assets This is effective against leveraged takeovers The loans bidders take normally rely on them being able to sell of target assets to repay