Michael_A._Hitt,_R._Duane_Ireland,_Robert_E._Hosk

Chapter 10: Corporate Governance 327

Table 10.2 Hostile Takeover Defense Strategies

Defense strategy

Success as a

strategy

Effects on

shareholder wealth

Capital structure change: Dilution of the target firm’s stock, making it more costly for an

acquiring firm to continue purchasing the target’s shares. Employee stock option plans

(ESOPs), recapitalization, issuance of additional debt, and share buybacks are actions

associated with this strategy.

Medium Inconclusive

Corporate charter amendment: An amendment to the target firm’s charter for the purpose

of staggering the elections of members to its board of directors so that all are not elected

during the same year. This change to the firm’s charter prevents a potential acquirer from

installing a completely new board in a single year.

Very low Negative

Golden parachute: A lump-sum payment of cash that is given to one or more top-level

managers when the firm is acquired in a takeover bid.

Low Negligible

Greenmail: The repurchase of the target firm’s shares of stock that were obtained by the

acquiring firm at a premium in exchange for an agreement that the acquirer will no longer

target the company for takeover.

Medium Negative

Litigation Lawsuits that help the target firm stall hostile takeover attempts: Antitrust

charges and inadequate disclosure are examples of the grounds on which the target firm

could file.

Low Positive

Poison pill: An action the target firm takes to make its stock less attractive to a potential

acquirer.

High Positive

Standstill agreement: A contract between the target firm and the potential acquirer speci-

fying that the acquirer will not purchase additional shares of the target firm for a specified

period of time in exchange for a fee paid by the target firm.

Low Negative

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81–114; H. Sapra, A. Subramanian, & K. V. Subramanian, 2014, Corporate governance and innovation: Theory and evidence, Journal of Financial & Quantitative Analysis, 49:

957–1003; M. Straska & G. Waller, 2014, Antitakeover provisions and shareholder wealth: A survey of the literature, Journal of Financial & Quantitative Analysis, 49: 1–32;

R. Campbell, C. Ghosh, M. Petrova, & C. F. Sirmans, 2011, Corporate governance and performance in the market for corporate control: The case of REITS, Journal of Real Estate

Finance & Economics, 42: 451–480; M. Ryngaert & R. Schlten, 2010, Have changing takeover defense rules and strategies entrenched management and damaged sharehold-

ers? The case of defeated takeover bids, Journal of Corporate Finance, 16: 16–37; N. Ruiz-Mallorqui & D. J. Santana-Martin, 2009, Ultimate institutional owner and takeover

defenses in the controlling versus minority shareholders context, Corporate Governance: An International Review, 17: 238–254; J. A. Pearce II & R. B. Robinson, Jr., 2004,

Hostile takeover defenses that maximize shareholder wealth, Business Horizons, 47(5): 15–24.

(other than the acquirer) to convert “shareholders’ rights” into a large number of common

shares if an individual or company acquires more than a set amount of the target firm’s

stock (typically 10 to 20 percent). Increasing the total number of outstanding shares

dilutes the potential acquirer’s existing stake. This means that, to maintain or expand its

ownership position, the potential acquirer must buy additional shares at premium prices.

The additional purchases increase the potential acquirer’s costs. Some firms amend the

corporate charter so board member elections are staggered, resulting in only one third of

members being up for reelection each year. Research shows that this results in manage-

rial entrenchment and reduced vulnerability to hostile takeovers.^113 Additional takeover

defense strategies are presented in Table 10.2.

Most institutional investors oppose the use of defense tactics. TIAA-CREF and

CalPERS have taken actions to have several firms’ poison pills eliminated. Many insti-

tutional investors also oppose severance packages (golden parachutes), and the opposi-

tion is increasing significantly in Europe as well.^114 However, an advantage to severance

packages is that they may encourage top-level managers to accept takeover bids with the

potential to best serve shareholders’ interest.^115 Alternatively, research results show that