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https://www.bir yuk law.com/hostile-takeover-defenses/

17 Defenses Against Hostile Takeovers

Antitakeover Defenses

In response to these hostile takeovertechniques, targets usually devise the following defenses:

1. Stock repurchase

Stock repurchase (aka self-tenderoffer) is a purchase by the target of its own-issued shares from itsshareholders. This is an effective defense that successfully passed suchprominent antitakeover defense cases as Unitrin above and Unocal Corp. v. Mesa Petroleum Co.

2. Poison pill

Poison pill (aka shareholder rightsplan) is a distribution to the target’s shareholders of the rights to purchaseshares of the target or the merging acquirer at a substantially reduced price.

What triggers an execution of theserights is an acquisition by an acquirer of certain percentage of the target’sshareholding.

If exercised, these rights canconsiderably dilute the acquirer’s shareholding in the target and thus candeter a takeover.

The poison pill is one of the mostpowerful defenses against hostile takeovers.

The pills can be flip-in, flip-over,dead hand, and slow/no hand.

· Flip-in poison pill can be“chewable,” which means that the shareholders may force a pill redemption by avote within a certain timeframe if the tender offer is an all-cash offer forall of the target’s shares. The poison pill can also provide for a window ofredemption. That is a period within which the management can redeem the pill.This window hence determines the moment when the management’s right to redeemterminates.

· “Dead hand” pill createscontinuing directors. These are current target’s directors who are the onlyones that can redeem the pill once an acquirer threatens to acquire the target.While the earlier court decisions restricted use of dead hand and no handpills, the more recent decisions uphold such pills.

· “No hand” (aka “slow hand”) pill prohibitsredemption of the pill within a certain period of time, for example six months.

3. Staggered board

Staggered board is a board in whichonly a certain number of directors, usually one third, is reelected annually.It is a powerful antitakeover defense, which might be stronger than is commonlyrecognized. For the reason of being too strong and reducing returns to thetarget’s shareholders, the latter happened to resist this type of defense.

4. Shark repellants

Shark repellants are certain provisionsin the target’s charter or bylaws deterring an acquirer’s desirability of ahostile takeover. This defense typically involves a supermajority voterequirement regarding a merger of the target with its majority shareholder.This defense also includes other takeover deterrent provisions in the target’scertificate of incorporation or bylaws.

5. Golden parachutes

Golden parachutes are additionalcompensations to the target’s top management in the case of termination of itsemployment following a successful hostile acquisition. Since thesecompensations decrease the target’s assets, this defense reduces the amount theacquirer is willing to pay for the target’s shares. This defense may thus harmshareholders. It, however, effectively deters hostile takeovers.

6. Greenmail

Greenmail is a buyout by the target ofits own shares from the hostile acquirer with a premium over the market price,which results in the acquirer’s agreement not to pursue obtaining control ofthe target in the near future. The taxation of greenmail used to present aconsiderable obstacle for this defense. Plus, the statute may require ashareholder approval of repurchase of a certain amount of shares at a premium.

7. Standstill agreement

Standstill agreement is an undertakingby the acquirer not to acquire any more shares of the target within certainperiod of time. A standstill agreement is an additional defense that usuallyaccompanies the greenmail described above.

8. Leveraged recapitalization

Leveraged recapitalization (aka corporaterestructuring) is a series of transactions designed to affect the equity anddebt structure of a corporation. Recapitalization usually involves suchtransactions as (i) sale of assets, (ii) issuance of debt, and(iii) distribution of dividends.

9. Leveraged buyout

Leveraged buyout is a purchase of thetarget by the management with the use of debt financing. This defense burdensthe target with the debt. In such a case, the management becomes a bidder andcompetes with a hostile acquirer for control over the target.

10. Crown jewels

Crown jewels are options under which afavored party can buy a key part of the target at a price that may be less thanits market value.

11. Scorched earth

Scorched earth is a self-tender offerby the target that burdens the target with debt.

12. Lockups

Lockups are defensive mechanisms infriendly mergers and acquisitions designed to deter hostile bids. The lockupsinclude (i) no-shop covenant, (ii) termination/bust-up fee, (iii) optionto buy a subsidiary, (iv) expense reimbursement etc.

13. Pacman

Pacman is a target’s tender offer forthe acquirer’s shares.

14. White knight

White knight is a strategic merger thatdoes not involve a change of control and relieves the target’s management ofthe responsibility to seek the best price available. An example is the case of Paramount Communications, Inc. v. Time Inc.

15. White squire

White squire is giving by the target toa friendly party of a certain ownership in the target. This defense iseffective against acquisition by the hostile party of a complete control overthe target by “freezing out” of minority shareholders.

16. Change of control provisions

Change of control provisions istarget’s contractual arrangements with third parties that burden the target inthe case of a change in its control.

17. “Just say no”

On top of all, the “just say no”approach is a board’s development and implementation of a long-term corporatestrategy which enables the board simply to reject a proposal of any potentialacquirer who would fail to prove that his acquisition strategy matches that ofthe target.

This list is non-exhaustive.

The variety of defenses shows that thepossibilities and, consequently, the power of directors in responding tohostile takeovers are virtually unlimited. Some defenses are more effectivethan others. Not all of them are necessarily “show-stoppers”, nevertheless. Oneexample, a golden parachute may decrease the price that the acquirer would bewilling to pay for the target, but it may not necessarily stop the hostileacquisition. Another example, a poison pill can easily lose its effect if theacquirer wins a proxy fight for the target and then redeems the pill.

The above hostile takeover techniquesand defenses show the unlimited scope of power that the board enjoys in itsantitakeover activity. The more power requires the higher degree ofresponsibility therefore.

Last but not least, consider devisingrelevant hostile takeover defenses from the very incorporation of yourbusiness.