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