Question

What are some of the defensive tactics that firms use to thwart takeovers?

How can a firm restructure itself? How do these methods differ in terms of ownership?

Answer 1

1. Firms use a variety of defensive tactics to thwart takeovers. Some of them are:

(i) Supermajority – This defensive tactic requires that substantial (around 70% to 80%) of the shareholders are to approve the acquisition. This tactic makes it difficult for another company to attempt a takeover as they will have to buy enough stock for a controlling interest.

(ii) Dual class stock – This allows company owners to hold onto voting stock and any new stock that the company issues to the public has either little voting rights or no voting rights. This will mean that investors can buy stocks but they will not be able to buy control of the company.

(iii) Flip in – This is a common poison pill provision that allows the existing shareholders to purchase more stocks at a steep discount in case any takeover attempt comes into picture. This results in a dilution of the company’s shares in a way so that the bidding company is not able to get a controlling share easily.

(iv) The Golden Parachute – This is a provision that exists in a CEO’s contract and as per this provision the CEO is entitled for a large and substantial bonus if the company is acquired by another company. This makes the acquisition more expensive and therefore less attractive.

(v) The Staggered Board defense – As per this defense tactic a company’s board of directors is segregated into different groups and only one part of one of the groups is out up for re-election at a meeting. Thus the entire board cannot be voted out at once and this will happen over a long period of time.