Question

Discuss how tactics such as shark repellents or poison pills accomplish their intent.

Answer 1

Shark repellent is a strategy adopted by a company to ward away an unwanted takeover attempt. This strategy is more beneficial for the management than for the stockholders since it damages the company's financial position. This strategy may be adopted by any of the following measures

Company may activate a special charter of by- laws.

The company may issue a large number of bonds having a provision that in case of a take over the bonds have to be redeemed at a very high price.

The company may enter into a contract with the top executives which may make it expensive to retire them.

A defensive merger or a super majority provision are other methods of shark repellent

A poison pill is another strategy adopted by companies to discourage hostile takeover. Under this strategy the company makes its shares less attractive to the acquirer. This strategy maybe flip in or flip over. Under flip in poison pill the company allows its existing shareholders to purchase more shares at a discount thus diluting shares held by the acquiring company. Under a flip over poison pill the company allows stockholders to purchase the shares of the acquirer after the merger at a discount.