Chapter 5

-Preventative

-Active

-Defenses installed in advance of a takeover

-Exercise in Wall Building

Defenses deployed during a takeover battle

-Poison Pills

-Corporate Charter Amendments

Acquiring company takes over the target, acquirer will have to swallow the posisonous consequences of the pill

-Purchase or offer for 20%+ of the company

-Until triggering event: rights trade with stock

-After triggering event: separate rights certificate (Shareholders can exercise them —> Acquirer not)

-Shareholders receive a dividend of one right per share

-Shareholders receive right to purchase a share at the exercise price anytime during exercise period

-Exercise Period: Typically 10 years

-Exercise Price: Typically 50% off —> Approval of Board of Directors needed

-Flip Over

-Flip In

-Back-End

-Shareholders of the target company purchase shares of the acquiring company at discount price

-Threatens to drastically dilute and devalue the stock of acquirer

-Target company dilutes value of its stock shares by offering more shares to shareholders.

-target enables existing shareholders to exchange existing securities for cash at a determined price

-US: Poison Pills quite common in the U.S.

-UK: not allowed unless shareholder approval

-EU: unsusual & disliked

-Japan: on the rise

-Pressure from shareholder rights —> no new or adopted plans

-Pills can be adopted quickly

-Staggered Boards

-Supermajority Provisions

-Fair Price Provisions

-Dual Capitalizations

-Anti-Greenmail Provision

• Structure: members fall into different classes with different terms

• Terms: differented time terms or level of responsibility

-Two different senses

-1: 2 stock types with different voting rights

-2: business valuation with different risk levels of tangible and intangible assets.

-All shareholders issued new high voting right shares

-Shareholders are then offered regular dividend shares for their high voting shares if they want to exchange

-Most shareholders want dividends more than voting rights

-Those who want voting rights will not exchange

-Shareholder amendments which require the bidder to pay fair price for all shares

-Offset two-tiered bid

-Fair can be: Certain P/E, Highest price paid for shares

-Greenmail

-Standstill Agreements

-White Knights

-White Squire

-Lock-Up Transactions

-Lock-Up Options

-Pac-Man Defense

Payment of a premium to buy shares of threatening shareholders

Payment to threatening shareholder not to purchase any more shares

Friendly Buyer; preferred compared to hostile takeover

Friendly buyer of stock block to put it in safe hands

Sale of assets that make target less desireable

An option that gives potential buyer right to buy certain assets at an attractive price

Make bid for the hostile bidder

-Tax Reform Act of 1986 —> limited tax deductibility of greenmail payments

-Revenue Act of 1987 —> imposes 50% tax penalty on gains from greenmail

-Average: White Knights incurred losses

-Reasons:

• Acquisition short-term based

• Auction which resullts in higher price

-Recapitalizations

-Leveraged Recapitalizations

Means to change the capital structure

Change the capital structure through the increased use of debt

-Refers to borrowing & use proceeds to finance a counterbid in opposing to a hostile bid

-Proceeds used for repurchasing stocks, etc.

shares, which grant the owners further rights of influence over the companies than the usual shareholder

Securities issued by potential target to make firm less valuable in eyes of hostile bidder

Target enacts amendments to make if more difficult for hostile bidder to implement changes in management