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Corporate Restructuring and Governance > 11. Takeover Defences > Flashcards

11. Takeover Defences Flashcards

1
Q

Role of The BDs: Learning Objs

A
  • Outline role of BoD
  • Explain the non-frustration principle.
  • Provide a rational for non-frustration principle.
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2
Q

Role of The BDs: Takeover Code (City Code)

A
  • Provides rules governing takeovers of UK PLCs
  • Ensures shareholders in target firms are treated fairly and are not denied an opportunity to decide on the merits of an offer.
  • All shareholders are given the same information.
  • Not favourable deals for any shareholders
  • The board must obtain independent advice on a bid and make advice available to shareholders.
  • Enforced by Panel on Takeovers and Mergers (Statutory Body)
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3
Q

Role of The BDs: Friendly Takeover

A
  • Target’s board recommends bid to its shareholders
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4
Q

Role of The BDs: Hostile Takeovers

A
  • Target’s Board recommends shareholders reject a bid and the bidder makes a takeover offer directly to shareholders.
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5
Q

Role of The BDs: Non Frustration Principle (MCC)

A
  • Efficiency Market for Corporate Control requires shareholders are not frustrated by target’s management from selling their shares.
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6
Q

Role of The BDs: Non-Frustration Principle

A
  • In Takeover code limits defensive action by target board: persuaders shareholders, lobby, find “white knight”, litigation
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7
Q

Role of The BDs: Non-Frustration Principle: What does it pre-suppose?

A
  • The MCC does not err in its selection of targets.
  • Hostile bid represents a fair price and is beneficial to target and acquiring firm.
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8
Q

Role of The BDs: Rationale for Non-Frustration Principle

A
  • Kershaw 2007
  • Ensures and active Market for Corporate Control that disciplines under-performing managers.
  • Takeover defence could be an agency cost (managerial entrenchment)
  • Successful defence prevents exploitation of synergies and scale/scope economies.
  • However, post-bid takeover defences can occur in the US and are in target shareholders’ interests if used to elicit a new offer.
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9
Q

Reasons for Takeover Defences (Ruback, 1987): LO’s

A
  • Examine motives for takeover defences being in shareholders interests.
  • Examine managerial motives for takeover defences.
  • Understand legal distinction between UK and US regarding takeover defence.
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10
Q

Reasons for Takeover Defences (Ruback, 1987): Shareholder Interests

A
  • Mgrs believe firm has hidden value - managers have private information that stock market cannot value.
  • Mgmt in firms with takeover defences do not have to succumb to short-term market pressure.
  • Increase offer price: managers use defences to increase offer price
    Use defences to create delay to try and create an auction with rival offers.
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11
Q

Reasons for Takeover Defences (Ruback, 1987): Managerial Entrenchment

A
  • If targets’ management will be removed post-takeover… managers use defences to protect their jobs…
    managers use defences because a takeover is a signal of their failure.
  • Incumbent managers believe they are the best managers of the target firm.
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12
Q

Reasons for Takeover Defences (Ruback, 1987): US Pre-Bid Defences

A
  • Dual class Recapitalisation
  • Staggered board elections
  • Poison pill
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13
Q

Reasons for Takeover Defences (Ruback, 1987): Post Bit US Defences

A
  • Greenmail
  • Litigation
  • Defensive Restructuring
  • Golden Parachutes
  • Lobbying
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14
Q

Reasons for Takeover Defences (Ruback, 1987): Pre-Bid UK Defences

A
  • Pure defences not allowed by business decision (recapitalisation) allowed if primary motivation not defensive.
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15
Q

Reasons for Takeover Defences (Ruback, 1987): Post-Bid UK Defences

A
  • Litigation
  • Defensive restructuring
  • Golden parachutes
  • Lobbying
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16
Q

Pre-Bid Takeover Defences: Dual Class Recapitalisation

A
  • Restructure equity of the firm into two classes with different voting rights - change preferred stock for common stock.
  • Inside managers can increase their voting power without increasing their equity stake by not participating in the exchange.
  • Evidence of negative ARs at announcement of a dual class recapitalisation (Jarrel and Paulson, 1989)
  • Firm value positively associated with insiders cash-flow rights and negatively associated with insiders voting rights (Gompers et al 2010)
17
Q

Pre-Bid Takeover Defences: Staggered Board of Director Elections

A
  • Directors are classified into groups, with a different group standing for election each year.
  • proponents argue it ensures continuity of experience and strategy.
  • Critics argue that it makes it difficult for a hostile bigger to gain control of the board, even wot a majority ownership stake.
  • Staggered boards associated with a reduction on firm value (Bebchuk and Cohen 2005 // Cohen and Wang 2013,2017)
18
Q

Unitary Board Definition

A
  • All directors stand for election each year
19
Q

Pre-Bid Takeover Defences: Poison Pill (Shareholders Rights Plan)

A
  • Target shareholders own shares with special rights triggered by a takeover - increases cost of takeover.
  • Evidence they do not deter takeovers but associated with takeover premiums (Comment and Schwart, 1995)
  • Reduce firm value by 5% upon adoption (Cremers and Ferrell, 2014)
  • Increases firm performance in innovative funds (Bhojra et al 2017) protects firms from short-term market pressure detrimental to the firm.
20
Q

Pre-Bid Takeover Defences: Flip-in Definition

A
  • Provide for existing target firm from shareholders to purchase additional shares in target firm at a discount.
21
Q

Pre-Bid Takeover Defences: Flip-Over Definition

A
  • Provide for target firm shareholders to purchase shares in there newly merged firm at a discount after a successful takeover.
22
Q

Post-Bid Takeover Defences: Target Share Purchasers (Greenmail)

A
  • Target firm buys shares from a potential bidder at a premium.
  • Often accompanied with a standstill agreement.
  • Concern is that greenmail protects under-performing managers.
23
Q

Post-Bid Takeover Defences: Target Share Repurchases Greenmail evidence

A
  1. Negative announcement returns (-2.57%)
  2. Positive repurchase premium of 18%
    3, Repurchasing firms outperforming similar firms by 16% 17 months later (Peyer, Vermaelen 2005)
    - Evidence suggests greenmail is not about managerial entrenchment, managers repurchase when they believe shares are undervalued.
24
Q

Post-Bid Takeover Defences: Litigation

A
  • Charges against bidders are filed on grounds of anti-competitive, securities violation, or fraud.
  • Delays bid, allowing time for entry for a competing bid.
  • Encourages bidder to raise price in return for dropping litigation.
  • Might discourage bids for inefficient firms but delay could increase shareholder wealth if an auction is created. (Franks and Harris, 1986)
25
Q

Post-Bid Takeover Defences: Defensive Restructuring (Financial)

A
  • Issue new shares and sell to investors that support current management.
  • Leveraged recapitalisation (issue debt and purchase equity/pay divided)
  • Reduce shareholder wealth (Ruback 1987)
26
Q

Post-Bid Takeover Defences: Asset Restructuring

A
  • Divest assets that bidder wants
  • Buy assets bidder does not want.
  • Restructure firms assets in the same way the bidder intends.
  • Evidence they reduce shareholder wealth.
27
Q

Post-Bid Takeover Defences: Golden Parachutes

A
  • Compensation to senior execs in the event of a control change.
  • Supporters argue they encourage mgrs to accept changes of control - which can be in shareholders’ interests.
28
Q

Post-Bid Takeover Defences: Golden Parachute (What do opponents argue)

A
  • They can increase costs of takeover
  • Reward managers for failure
  • Weaken the disciplinary effect of the market for corporate control.
  • Motivate managers to sell out, even if their private information indicates takeover is not in shareholders interests.
29
Q

Post-Bid Takeover Defences: Golden Parachutes Evidence

A
  • Bebchuk et al 2014 find firms that adopt GPs… experience negative ARs to stock when they are adopted.
  • Associated with higher acquisition premiums
  • Overall negative effect on shareholder wealth
30
Q

Post-Bid Takeover Defences: GP Evidence Consistency

A
  • GPs weakening incentive effects of MCC
  • Providing incentives to support a takeover even if it is not in shareholders’ interests.
31
Q

Summary of Takeover Defences

A
  • Different perspectives in the UK and US on the role of takeover defences.
  • Takeover defences could diminish the effectiveness of the market for corporate control, entrenching underperforming managers.
  • Takeover defences can be used to extract a premium for target firms’ shareholders.

Corporate Restructuring and Governance (8 decks)

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