Part 10- Corporations, Chapter 43: Management of Corporations, Doc 5

The section on board opposition to takeovers in Management of Corporations explains various defensive tactics that boards of directors may adopt to fend off hostile takeover attempts, where an outside entity (often called a "raider") seeks control of a company, usually by offering shareholders a premium price for their shares. Here is an overview of the key defensive strategies and their mechanisms: 1. Friendly Shareholders: Corporations can create employee stock option plans (ESOPs) and target loyal shareholder bases, like pension funds or local community members, to build a foundation of "friendly" shareholders less likely to support a raider’s offer. 2. Golden Parachutes: These are lucrative severance packages for executives triggered by a change in company control. Such packages increase the cost of acquisitions, discouraging raiders. 3. Greenmail: The target repurchases shares from the raider at a premium, on the condition that the raider halts further acquisitions. This often includes a standstill agreement to prevent the raider from buying additional shares for a period. 4. Pac-Man Defense: The target reverses the roles by attempting to acquire the raider, creating a two-way takeover battle reminiscent of the Pac-Man game where characters chase each other. 5. Long-Range Acquisition Strategy: Having a clear, strategic acquisition plan can help justify rejecting hostile bids by claiming that the acquisition interferes with the corporation’s long-term objectives. 6. Scorched Earth Tactics: Aggressive public relations and legal campaigns against the raider aim to cast them unfavorably. This may include highlighting the raider’s shortcomings or predicting job losses and relocations if the takeover succeeds. 7. Lock-Up Option: This involves an agreement between the target and a preferred acquirer (or "white knight") allowing the white knight to buy valuable assets at favorable terms if the hostile bid is successful, deterring the hostile raider by reducing the target’s appeal. 8. Poison Pill: Through issuing preferred shares with special rights, the target corporation dilutes the raider's stake, making the takeover financially undesirable. Common poison pills allow existing shareholders to purchase additional shares at a discount, increasing the acquisition cost for the raider. 9. Stock Trading Surveillance Program: The target monitors unusual stock trading activity as early warning signs of a takeover attempt, which provides additional time to prepare defensive measures. 10.Control Share Law: In states with these laws, when a raider quickly acquires a substantial stake, the shares may lose their voting rights unless approved by the target's board or shareholders, making voting control harder to secure without board cooperation. 11.White Knight: The target seeks out a "white knight," a friendly bidder who the target’s management prefers over the hostile bidder, often willing to offer a higher price or better terms. These tactics reflect both financial and strategic responses available to corporations facing unsolicited acquisition offers, enabling boards to protect shareholder interests and corporate strategies against unwanted control changes. The business judgment rule typically protects directors in using these defenses as long as they are informed, free from conflicts of interest, and act in what they believe to be the corporation’s best interests.