Introduction to Corporate Finance

ONLINE CHAPTERS

21-4c TAKEOVER DEFENCES AND DIVESTITURES

Takeover Defences

Takeover defences are defensive measures that many companies rely on to ward off surprise or

unwanted takeover attempts. Some of these defences are written in company charters, and most

countries and states have extensive takeover statutes that dictate the offer and defence strategies for

companies incorporated in that state. Not only might these defensive tactics prevent an unwanted

takeover, but they can also provide a shield that a target can use to delay a takeover attempt in a way

that strengthens the target’s negotiating power. Table 21.4 describes several takeover defences.

Many of these provisions have the ultimate effect of increasing the price the bidder must pay to

acquire the target.

TABLE 21.4 COMMONLY USED ANTI-TAKEOVER DEVICES

Measure Anti-takeover effect

Fair-price amendments Require that a fair price be paid to all shareholders in the event of a takeover, usually defined as the highest price

paid to any shareholder

Golden parachutes Large termination payments and other arrangements made to target executives that are activated after a takeover

Greenmail The payment of a premium price for the shares held by a potential hostile acquirer but not paid to all shareholders;

prevented in some legal jurisdictions

Just-say-no defence Refusal to accept a takeover offer on the grounds that management feels it is not in the long-term interests of

shareholders^26

Pac-Man defence The initiation of a takeover attempt for the hostile acquirer itself

Poison pills Dilution of the value of shares acquired by a hostile bidder through the offer of additional shares to all other

existing shareholders at a discounted price

Poison puts Deterrent to hostile takeovers through put options attached to bonds that allow the holders to sell their bonds back

to the company at a pre-specified price in the event of a takeover or change in control

Recapitalisation A change in capital structure designed to make the target less attractive. Usually involves a substantial increase

in debt

Classified boards Only a fraction of directors stand for election in any given year, for example, because of different term lengths or

staggered start/end dates, making it harder for an outsider to take control by electing a majority of the board

Standstill agreements Negotiated contracts that prevent a substantial shareholder from acquiring additional shares for a defined period

of time

Supermajority approvals Require the approval of large majorities (such as 67% or 80%) for a takeover to occur

White knight defence The pursuit of a friendly acquirer to take over the company instead of a hostile acquirer

White squire defence The sale of a substantial number of shares to an entity that is sympathetic to current management but has no

current intention of acquiring the company

Divestitures

We have explored in detail how and why a company goes about acquiring assets from another company.

But what about the other side of the transaction, when a company wants to divest (get rid of) one of

takeover defences
Means by which a target
thwarts or delays a takeover
attempt

26 The courts generally do not engage in second-guessing past business decisions made by a company. The courts presume that managers and

boards of directors generally make business decisions that are in the best long-run interests of shareholders, according to a case law concept

known as the business judgement rule. Thus, at times, a board can just say no and reject what appears to be an attractive takeover offer,

under the logic that the board knows what is best for the shareholders in the long run, even if an offer is for a large premium, or the share

market reacts negatively to the rejection of an attractive offer. See Section 21-5 for additional discussion.