Whitemail is a strategy that a target company can implement for stopping the hostile takeover. Under whitemail, the target organization issues a large number of shares at the prices prevailing below market rates, which are then offered to an amiable third party for sale. As the number of shares becomes large, it becomes difficult for the acquiring company to buy all shares in order to have control. This ultimately raises the entire price of the takeover, and leads to the dilution of shares. Also, the third party that is already on friendly terms with the target company, gains control over a big chunk of shares. Therefore, the total number of friendly shareholders accelerates as well.
A Little More on What is Whitemail
Whitemail is a clean strategy used to avoid an undesirable attempt of takeover. The company issues shares at a price lower than the market price, and sells them further to a favorable third party. If the target company becomes successful in avoiding the takeover using whitemail, then the company may decide if it wants to either buy back the shares or let them be outstanding.
XYZ Corporation holds 1,000,000 shares that are outstanding. A company named ABC Inc. is planning to acquire XYZ Corporation by purchasing all of its shares in the secondary market. If they are able to do so, they will a huge quantum of shares. As soon as XYZ Corp comes to know about this, it implements the whitemail policy. The company issued 250,000 new shares at a discounted rate, and sold them further to a friendly company called DEF Industries. Now, the number of shares issued by XYZ Corp increased from 1000,0000 to 1,250,000, which means that ABC Inc. will have to buy more number of shares for acquiring the company. As there is a dilution of voting rights of XYZ shares, this will decrease the power of ABC Inc. to cast their vote for the members who support the takeover attempt.
References for “Whitemail”
Academic research for “Whitemail”
Revisiting the Anti-Takeover Fervor of the’80s Through the Letters of Warren Buffett: Current Acquisition Practice Is Clogged by Legal Flotsam from the Decade, Oesterle, D. A. (1997). Revisiting the Anti-Takeover Fervor of the’80s Through the Letters of Warren Buffett: Current Acquisition Practice Is Clogged by Legal Flotsam from the Decade. CARDozo L. REv., 19, 565.
A legal perspective of hostile takeover defensive measures in China and Malaysia, Ali, H. M., & Kai, L. (2014). A legal perspective of hostile takeover defensive measures in China and Malaysia. Business Law Review, 35(2), 54-59.
Takeover Defenses and Corporate Governance, Barik, N. (2012). Takeover Defenses and Corporate Governance. Available at SSRN 2039844.
Introduction: chapter 1: part one: background and general meaning of corporate control, Matsaneng, M. E. (2010). Introduction: chapter 1: part one: background and general meaning of corporate control. Transactions of the Centre for Business Law, 2010(46), 1-9.
Survival of the biggest?, Lunt, P. (1996). Survival of the biggest?. American Bankers Association. ABA Banking Journal, 88(6), 47.
An overview of ideas and principles on equity valuation that emerge from Warren Buffet’s [ie Buffett’s] letters to the shareholders of Berkshire Hathaway Inc., Lawrence, C. (1998). An overview of ideas and principles on equity valuation that emerge from Warren Buffet’s [ie Buffett’s] letters to the shareholders of Berkshire Hathaway Inc.