Ch05 - Antitakeover Measures

Chapter Five
Antitakeover
Measures
Patrick A. Gaughan
Mergers, Acquisitions, and Corporate Restructurings
John Wiley & Sons, 6th edition, 2015
Antitakeover Defenses
• Two Types:
• Preventative
• Defenses install in advance of a takeover
• Exercise in Wall Building
• Active
• Defenses deploy during a takeover battle
All Rights Reserved. © May not be reproduced, copied, or otherwise used without the express, written permission of Dr. Patrick Gaughan
Preventative
Antitakeover Defenses
Preventative
• Types of Preventative Defenses:

• Poison pills
• Corporate charter amendments
• Corporate Charter: the articles of
incorporation and the corporate by laws
Poison Pills
• Number of Companies with Poison Pills:
➢Over 1,500 corporations have poison pills
56% of the Fortune 500
➢68% of the Fortune 200
➢52% of Business week 1,000
• Other Name for Poison Pills – Shareholders Rights Plans
• Meaning of Poison Pill Name: if the acquiring company

takes over the target the acquirer will have to swallow
the poisonous consequences of the pill.
Poison Pill Adopted: 1983–2014
900
800
700
600
Number
500
400
300
200
100
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Source: Thomson Financial Securities Data, March 6, 2015.
Poison Pill International Laws
• U.S. Poison Pills quite common in the U.S.
• UK: not allowed unless have shareholder
approval
• UK big on shareholder right
• EU: frowned upon
• Japan: starting to see their use in Japan (see
next slide)
Different Types of Poison Pills
❑ Flip Over - grants shareholders special benefits once:

a) Triggering event occurs: 20% share or asset ownership
or offer for 20% - 30% and
b) Merger between acquirer and target occurs
- Shareholder can then convert special rights to buy stock
in acquirer (which now owns target) at half price
c) Do not prevent an acquisition of a controlling interest that
is less than 100%
Different Types of Poison Pills (cont.)
❑ Flip In – now almost always accompanies a flip - over provision

a) Occurs after similar triggering event & merger
b) Allows holders to buy shares in target at 50% off
c) Deals with the less than 100% controlling interest acquisition
❑ Back-End (like put option)

- Once triggering event occurs (but not necessary merger)
holders of stock can exchange their shares for a price which
the company's board believes is fair
- Usually a price which is above market price
- Can apply to holders of notes as well
How Poison Pills Work
• Shareholders receive a dividend of one right per share of
common
• Rightsholders receive right to purchase a share at the exercise
price anytime during the exercise period
- Exercise period: typically 10 years
- Exercise price: typically 50% off: buy $200 worth for $100
• Approval: In U.S. usually only need Board of Directors approval
not shareholders
Why? Considered a dividend and dividend policy set by board
How Poison Pills Work (cont.)
• Triggering Event: Typically purchase of 20% or offer for 30%

- Until Triggering Event: rights trade with the stock
not issued separately
- After Triggering Event: Separate rights certificates mailed
to shareholders.
They become exercisable
• Acquirer: Acquirer can’t exercise its rights
• Redeemability: rights redeemable until control threshold is crossed.
- Typically $0.02 per right
Example of Poison Pills
• Assume Corp A makes hostile bid for Corp.
B, which has poison pill
• B has poison pill with exercise price of $60
• Companies normally set exercise price equal to
long-term value of stock
• Often set 3 – 5 X current value
• Set with use of valuation firm
• Right now Target, B, has stock price of $10
• Pill allows B shareholders to buy B shares
at 50% off or $5
Example of Poison Pills (cont.)
• So can exercise at $60, which means pay
$60 to exercise warrant
• But warrant allows shareholder to buy
shares at $5 (50% off)
• So how many shares do they get?
• $60/$5 = 12 shares for each warrant
• Who gets these warrants?
• Non-control shareholders?
• Let’s assume 1,000 shares outstanding
• Hostile bidder bought 20% or 200 shares
• So then pill was triggered and the other
shareholders, not bidder, get these warrants
(800 of these shareholders)
• How many shares will get issued?
• Each shareholder who exercises a warrant can
get $60/$5 = 12 shares
• 800 X 12 = 9,600 new shares get issued
• How many shares outstanding after pills
exercised?
• 1,000 + 9,600 = 10,600
• What was bidder’s % control before
warrants exercised?
• 200/1000 = 20%
• How about afterwards?
• 200/10,600 = 1.89%
• Huge loss of control in target
• How about return on investment for bidder?
Simplistically:
• Value of Corp B equity prior to exercising
warrants was $10 X 1,000 shares = $10,000
• After exercise new capital is $60 X 800 =
$48,000
• So total capital = $10,000 + $48,000 =
$58,000
• Shares outstanding = 1,000 + 9,600 =
10,600
• Per share: $58,000/10,600 = $5.47
• Loss of Value:
• ($10 - $5.47) / $10.00 = 45.3%
Household International Decision
• November 1985 Delaware Supreme Court approved the

legality of poison pills
• Court said the existence of poison pills does not prevent

a firm from receiving a tender offer.
• Court stated that the pills did not keep bidders away but
rather helped companies get a better price when the business
is sold
Poison Pill Court Decisions:
Unfair Use of a Poison Pill
❑ Maxwell vs. Macmillan – 1988
Delaware Court ruled that Macmillan unfairly used its

poison pill to prevent an auction rather than promote one.
- Court said Macmillan was unfairly using its poison pills
to favor its own restructuring plan.
❑ Rales vs. Interco – 1988
Delaware Court ruled that Interco was using its poison

pill to unfairly favor its own recapitalization plan.
Airgas v. Air Products
• November 2010
• Delaware Supreme Court rules that poison
pills meet the Unocal Standard
• Air Products sued to require Airgas to
redeem the poison pill and allow
shareholder to vote for the takeover offer by
Air Products
• Court ruled that the decision to sell the
company is up to the board
NOL Pills
• Net Operating Loss (NOL) allow companies to offset
other income in the future and lower its tax
obligations.
• In Selectica, Inc. v. Versata, Inc. (2010) the Delaware
court concluded that it was legitimate for a company
to use its pill.
• Here trigger threshold was a low 4.99% trigger
threshold, to protect its NOLs.
• Decision was interesting in that the court did not have
a problem with the fact that the value of the NOLs
was not clearly established.
• Case was also interesting in that it was one of the rare
instances where a bidder actually triggered a pill.
Trends in Poison Pill Plans
• Due to pressure from shareholder rights

organizations such as ISS, companies have
not been renewing or adopting many of
their poison pill plans (see next slide)
• Also, since pills can be adopted quickly, not
having one does not necessarily mean that if
a company needs one it can’t get one
quickly
U.S. Incorporated Poison Pills in Effect at Year End
2,500
2,000
# Companies
1,500
1,000
500
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Year End
Source: FactSet SharkRepellent

Poison Pill Research: Industry Research
❑ Georgeson & Co. examined 48 companies receiving tender

offers between 1/01/86 - 10/19/87
- looked at deals over $100 million
- Found pill-protected companies received 69% higher premiums.
- Protected company premiums: 78.5% above pre-announcement
price
- Unprotected company premiums: 56.7% above pre-announcement
price
Takeover Premium and Poison Pills by Target Market cap
(Large Cap>=$1bill., small Cap<$1bil.)
Source: Poison Pills and Shareholder Value: 1992-1996, Nov.1997
2nd Georgeson Study on Poison Pill
Premiums: 11/97
• Found similar results to the first Georgeson study

but the premiums were lower.
• Premiums of pill protected companies were eight

(8%) percentage points higher than non-pill-
protected companies – less than first study.
• Difference was greater for smaller capitalization

companies than for large capitalization companies.
Poison Pill Research: Academic Research
Early Studies:
• Malatesta & Walking (1988) and Ryngaert
(1988) found that the adoption of poison
pills were associated with negative
shareholder wealth effects
• Supports the management entrenchment
hypothesis
• Later Studies: Comment & Schwert (1995)
also found poison pills were associated with
higher takeover premiums
• Consistent with Georgeson
Preventative Antitakeover Measures
Corporate Charter Amendments

- Staggered Boards
- Supermajority Provisions
- Fair Price Provisions
- Dual Capitalizations
- AntiGreenmail Provisions
Staggered Boards
• Normal board election process – every

director comes up for election each year at
the shareholder meeting
Staggered Boards (cont.)
• Also called classified boards

• This is where all the directors do not come
up for election at the same time
• Ex: only 1/3 at a time
• Proxy Contests: In a proxy contest this
means that an insurgent can only prevail after
winning 2 successive elections
• Early 2000s: majority of companies had
classified boards
• By 2007: 55% had declassified boards
Staggered Boards (cont.)
• Leaky Staggered Board – where
controlling shareholder has right to increase
the size of the board
• This is determined by if it is in the corporate
charter
• If so, controlling shareholder may replace 1/3
of board but also add new board members to
the larger board and thereby get a majority
quickly
S&P1500 Classified Boards at Year End (Includes Non-
U.S. Incorporated Companies)
1,400
1,200 935
904 907 912 919 920
896
856
1,000
801
# Companies
746
708
800 672
635
608
600 S&P 1500
556
510 S&P 500
400
200
303 303 300 294 302 286 265 237 207 181 172 164 146 126 89 60
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year End
Source: FactSet SharkRepellent

Staggered Board Data
• Amount of staggered boards has been
declining
• 2005: 53% boards were staggered
• 2012: 17% boards were staggered
Staggered Board Data (cont.)
• The declassification of board trend more
pronounced at S&P500 companies then at
smaller cap small companies
Antitakeover Defenses & Acquirer Returns
• Masulis, Wang & Xie, “Corporate
Governance & Acquirer Returns” Journal
of Finance, August 2007
• Acquirers with more antitakeover defenses
in place have significantly lower
announcement period returns
• Supports managerial entrenchment hypothesis
• These CEOs may be more likely to engage in
empire building
Dual Capitalization
• Where have one of more classes of stock – usually
one with super voting rights
• Sometimes called alphabet stock
• Ex: GM has Class E (EDS) and Class H (Hughes
Aircraft) shares
• GM acquired EDS in 1984 for $2.5 billion
• This was Roger Smith’s strategy to acquire EDS
in response to his great data processing needs and
the computerization of autos
• Ross Perot was EDS’s CEO
• Perot resisted acquisition by GM using GM stock
• EDS was rapidly growth – GM was not
• GM’s solution was to create a special class of
stock – Class E shares tied to the profitability
of EDS division
Process of Dual Capitalization Issuance
• All shareholders issued new high voting

right shares
- these are also low dividend shares
• Shareholders are then offered regular
dividend shares for their high voting
shares if they want to exchange
Why Are Dual Capitalizations Approved
• Most shareholders want the greater dividends

• Most value the dividends more than voting rights
• Those who want voting rights will not exchange
• These shareholders will enjoy enhanced voting power
and control
Dual Capitalization Research
• Megan Partch (1987): Sample 44 companies (1962-84)
➢ Found no relationship between dual capitalization and
stock prices.
But:
• Jarrell & Poulson (1988): Sample 94 firms (1976-87)
➢ Found significant negative abnormal returns equal to
–0.82%
➢ The negative returns were even greater when
management had a high percentage of stock.
✓This makes sense since dual capitalization will
give management even more power.
✓Mkts interprets management more power is bad
Dual Capitalization Research (cont.)
• Bacon Cornett and Davidson (1997) showed

whether there were negative shareholder wealth
effects depended on how many independent
directors were on the board
• More independent directors, less likely negative effects

Dual Capitalization Research (cont.)
• Masulis et al. 2009
• Found that companies with dual
capitalizations performed more poorly
compared to companies that did not have
such share structures
• Dual cap companies also paid their CEOs
more than other companies
• Supports the view that dual capitalizations
entrench management
Fair Price Provisions
• These are shareholder amendments
which require bidder to pay a “fair
price” for all shares acquired
• They are designed to offset the two-
tiered bid
• Fair may be:
• Certain P/E
• Highest price paid for any shares
• Highest price stock traded for over past
year
Supermajority Provisions
• Charter amendments requiring higher than
majority voting approval for certain events –
e.g., changing board
• Ambrose and Megginson (1992) found that

companies with supermajority provisions
less likely to be target of a takeover bid
• Implies they may be a somewhat effective
antitakeover device
Antigreenmail Provisions
• Charter amendments which prohibit

payment of greenmail
• Greenmail will be discussed shortly
Business Judgment Rule
• Directors are able to exercise reasonable business

judgment in exercising their fiduciary responsibilities
for shareholders.
• Courts are not there to second guess the bad decisions

of directors and management.
➢ If decisions are bad that is shareholders’

responsibility for putting them in these positions.
• Director’s Liability – directors can be found to be liable

if they are negligent.
Active Antitakeover
Defenses
Active Antitakeover Measures
• Greenmail – Payment of a premium to buy shares of
threatening shareholders.
• Standstill Agreements – Payment to threatening
shareholder not to purchase any more shares.
• White Knights – Friendly buyer; preferred compared to
hostile buyer.
• White Squire – Friendly buyer of a block of stock that it is
put in safe hands.
• Lock-Up Transactions: Sale of assets that make target less
desirable.
• Lock-Up Options: An option that give potential buyer
right to buy certain assets at an attractive price.
• Just Say No: say do not want to be bought
• Pac-Man Defense: make bid for the hostile bidder
Unocal Post-Script
• 2005 Chevron acquired Unocal
• CNOOC bid for Unocal
• This was resisted by U.S. government
and media
• This opened the door for Unocal to
seek a competing bid
Tax Law Changes and Greenmail
• Revenue Act of 1987 – imposes 50% tax penalty

on any gains derived from greenmail in the raider
threatened to take over corporation.
• Tax Reform Act of 1986 – limited the tax

deductibility of greenmail payments.
• Any premium over market value is not deductible.
Greenmail Research
• Bradley & Wakemen (1983) looked at 86 repurchases
from insiders or those unaffiliated with corporation.
• Results:
1. Repurchases at a premium from insiders or small
shareholders increase the wealth of nonparticipating
shareholders.
2. Privately negotiated repurchases of a single block of
stock from shareholders unaffiliated with company
reduced the wealth of nonparticipating shareholders.
• Mikkelson & Ruback (1986)

➢ Showed an overall positive impact of +7%
➢ Theorized that there were both a downward impact
caused by the elimination of threat for takeover but
that this was then offset by demand increasing effect
of the purchasing (but see next slide).
Greenmail Research (cont.)
• Bhagat and Jefferis (1994) found the
performance of companies that paid
greenmail was no worse that other
companies.
Greenmail Research (cont.)
• Ang & Tucker – managers who paid
greenmail were more likely to be let go in
the years after the greenmail payments than
a control group of other managers
White Knight Research
• Banerjee & Owers (1992) study of 100 white

knights over 1978-1987.
➢ Showed that on average the white knights
incurred losses
• Reasoning for the losses:
a) The acquisitions may not be part of a long-term

strategic plan and may not be as advisable as
other more well-thought-out deals.
b) The white knights are in an auction which tends

to result in higher priced targets.
Capital Structure Changes
I. Issue More Shares
1. General Issue
2. White Squire
3. ESOP
II. Buyback Own Shares
1. Self Tender
2. Target Share Repurchases
3. Open Market Purchases
III. Recapitalization Plan
IV. Assume More Debt
1. Issue More Bonds
2. Take Out Bank Loan
Recapitalization Plans
• Recapitalizations – generally means to change the

capital structure
• Leveraged Recapitalizations – change the capital

structure through the increased use of debt.
• In a Takeover Context: it usually refers to borrowing

and uses the proceeds to finance a counterbid in
opposing to a hostile bid.
➢ The proceeds may be used to repurchase stock

which is offered as an alternative to proposed
purchases by a bidder, such as through a tender
offer.
Leveraged Recapitalizations
• Leveraged Recapitalizations as an Antitakeover

Defense– company takes on debt and used the
proceeds to pay dividend to shareholders
• The proceeds could also be used to buy back
shares
• This is presented to shareholders as an
alternative to the hostile bid
Pac-Man Defense
• Where the target makes a bid for the bidder
• Few but some notable cases
• Bendix – Martin Marietta
• November 2013: Men’s Wearhouse made a
bid for Jos A Bank
• Earlier J Bank offered $2.3 billion to buy
Men’s Wearhouse but Men’s Wearhouse
said bid too low
• Men’s Wearhouse offered $1.5 billion for
Jos Bank

Ch05 - Antitakeover Measures

Uploaded by

Copyright:

Available Formats

Ch05 - Antitakeover Measures

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ch05 - Antitakeover Measures

Uploaded by

Copyright:

Available Formats

Chapter Five

• Types of Preventative Defenses:

• Other Name for Poison Pills – Shareholders Rights Plans

• Meaning of Poison Pill Name: if the acquiring company

❑ Flip Over - grants shareholders special benefits once:

❑ Flip In – now almost always accompanies a flip - over provision

❑ Back-End (like put option)

• Triggering Event: Typically purchase of 20% or offer for 30%

• November 1985 Delaware Supreme Court approved the

• Court said the existence of poison pills does not prevent

❑ Maxwell vs. Macmillan – 1988

Delaware Court ruled that Macmillan unfairly used its

❑ Rales vs. Interco – 1988

Delaware Court ruled that Interco was using its poison

• Due to pressure from shareholder rights

Source: FactSet SharkRepellent

❑ Georgeson & Co. examined 48 companies receiving tender

Source: Poison Pills and Shareholder Value: 1992-1996, Nov.1997

• Found similar results to the first Georgeson study

• Premiums of pill protected companies were eight

• Difference was greater for smaller capitalization

Corporate Charter Amendments

• Normal board election process – every

• Also called classified boards

Source: FactSet SharkRepellent

• All shareholders issued new high voting

• Most shareholders want the greater dividends

• Bacon Cornett and Davidson (1997) showed

• More independent directors, less likely negative effects

• Ambrose and Megginson (1992) found that

• Charter amendments which prohibit

• Directors are able to exercise reasonable business

• Courts are not there to second guess the bad decisions

➢ If decisions are bad that is shareholders’

• Director’s Liability – directors can be found to be liable

• Revenue Act of 1987 – imposes 50% tax penalty

• Tax Reform Act of 1986 – limited the tax

• Any premium over market value is not deductible.

• Mikkelson & Ruback (1986)

• Banerjee & Owers (1992) study of 100 white

• Reasoning for the losses:

a) The acquisitions may not be part of a long-term

b) The white knights are in an auction which tends

• Recapitalizations – generally means to change the

• Leveraged Recapitalizations – change the capital

• In a Takeover Context: it usually refers to borrowing

➢ The proceeds may be used to repurchase stock

• Leveraged Recapitalizations as an Antitakeover

You might also like