Hostile Takeover Defense - Poison Pill
Common Examples of Defenses to Hostile Takeovers
Written by Jason Gordon
Updated at July 2nd, 2021
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Table of Contents
What are Poison Pills?What are Preferred Share Issuances?What is Dual Class Recapitalization?What is an Employee Stock Ownership Plan? Academic ResearchWhat are Poison Pills?
These provisions have the objective of raising the cost of acquisition to the acquirer in hopes of making the acquisition prohibitively expensive. Some common examples are discussed below.
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What are Preferred Share Issuances?
The board may approve a preferred class of shares that grant extensive rights to existing shareholders. The preferred shareholder may generally exercise her rights in the event of a takeover offer or a purported acquirer obtains a controlling block of shares.
Note: Types of preferred share issuances include flip-over plans and flip-in plans. The flip-over plan allows the preferred shareholder to convert or purchase common shares at a very low cost. In flip-in plans, the shareholder can force the corporation to repurchase the preferred shares at a premium. Both of these provisions cost the acquirer lots of money.
What is Dual Class Recapitalization?
The board distributes a new class of equity to stockholders with superior voting rights but inferior dividends or marketability. The new shares allow shareholders to exchange these shares for some multiple (2x, 3x, etc.) of ordinary common stock. This will augment the voting power of existing managers and make it more difficult for an acquirer to obtain a controlling block of shares.
Example: I receive preferred shares that allow me numerous votes per share and the ability to convert the preferred shares into large numbers of common stock. This gives me an inordinate amount of voting power for the price of the share.
What is an Employee Stock Ownership Plan?
This plan may allow employee (particularly executive) stock plans to vest at an accelerated rate. These types of plans are known as golden parachutes. They force the acquirer to purchase far more shares at a higher valuation.
Example: I am CEO of ABC Corp. In my employment contract, I reserved the right to receive 10 years worth of compensation in stock options that vest immediately if I am relieved from my position without cause. If ABC Corp is acquired in a hostile takeover and I am replaced as CEO, this could cause substantial expenses to the corporation. If this provision is included in the contract of enough senior managers, it could make an acquisition unattractive.