404B: FINMAN II: Chapter 6: Mergers and Acquisitions: Notes on DEFENSES AGAINST HOSTILE TAKEOVERS
1. Staggered Board of Directors – The positions in the board of
directors are not filed at the same time. Only a fraction (usually a
third) of the members of the board of directors are elected each year.
Should the bidding company win in the recent election, they would
still not have majority votes to acquire the target firm.
2. Supermajority Provisions – requires shareholder approval of a
number of votes which is more than what is legally for all transactions
involving change of control, mergers and takeovers.
*Under the Corporation Code of the Philippines, mergers and
acquisitions require a majority vote of the members of the board,
and subsequently the vote of stockholders representing at least
two-thirds (2/3) of the outstanding capital stock of each
corporation.
3. Back-end Plans – The target company provides existing
shareholders, with the exception of the company attempting the
takeover, with the ability to exchange existing securities for cash or
other securities valued at a price determined by the company’s board
of directors.
4. Share Buyback – Shares are bought out by the target firm from the
market in order to reduce the number of shares that are on the
market and can be bought by the acquiring firm.
5. Greenmail/ Target Repurchase – Shares are repurchased by the
target firm away from the bidder or acquiring firm at a higher price
which makes the bidder happy to leave the target alone.
6. Standstill Agreement – A contract that contains provisions that
restricts how a bidder of a company can purchase or dispose stocks
of the target company. A standstill agreement can effectively stall or
stop the process of a hostile takeover if the parties cannot negotiate a
friendly deal.
7. People Pill – threatens the acquiring firm that the acquiree
management will quit en masse in the event of a successful hostile
takeover.
8. Poison Pill or Shareholder Rights Plan – gives a prospective
acquiree’s shareholders the right to buy shares of the firm bought by
anyone at a deep discount.
9. Suicide Pill/ Jonestown Defense – extreme poison pill that may
lead to the bankruptcy of the target corporation
10. Pacman Defense – the target firm also attempts to take over the
acquiring firm.
11. Macaroni Defense – allows the acquiree to issue a large number of
bonds that must be redeemed at a higher value if the company is
taken over. It suddenly expands or increases the cost of a hostile
takeover.
12. Nancy Reagan Defense – When the acquiring firm makes a formal
bid to the shareholders to buy their shares, the board of directors of
the target firm simply denies or “just says no” to the bid.
13. Silver and Golden Parachutes – allows the all employees (silver) or
top management (golden) a large lump-sum cash compensation in
the event that they are eliminated from their positions as a decision
by the acquirer.
14. Pension Parachutes – allows the cash in the pension fund of the
acquiree firm to be solely used for the pension plan participants. The
fund remains to be the property of the plan’s participants, e.g. the
original employees.
15. Whitemail – The target company sells significantly discounted stocks
to a friendly third party.
16. White Squire – A friendly company buys a stake in a target company
to prevent a hostile takeover.
17. White Knight – A friendly company buys a significant number of
shares to prevent a hostile takeover while allowing it to have control
over the target firm
*Black knight – the unfriendly company or acquiring firm
*Gray knight – a second unsolicited acquiring firm
*Yellow knight – an unfriendly company which has backed out
from its plans on acquiring a firm but instead offers to have a
merger of equals.
18. Crown Jewel – The target company sells some of its most valuable
assets to a third party to reduce the value of the company.
19. Scorched Earth – The target company seeks to make itself less
attractive to hostile bidders (sell valuable assets, increase debt, etc).
20. Killer Bees – The target company employs several experts
(investment bankers, accountants, attorneys, tax, specialists) who
can provide various anti-takeover strategies.
21. Lobster Traps – The target firm includes a provision that prevents
individuals with more than 10% ownership of convertible securities
from transferring these securities to voting shares.
Prepared by: MKua