Ch 3 Deck 6 Flashcards
Buyer strategy in which a potential buyer attempts to take over a corporation by changing who is on the board of directors through a special election
proxy contest
in a proxy contest, the election of new board members may occur
at an annual meeting or a special meeting of the shareholders
Proxy contests are used less often than other take-over strategies for several reasons:
1) Their outcomes are less certain,
2) They are more expensive than other methods,
3) Shareholder voters are often apathetic and tend not to vote for change, and
4) Incumbent board members can use the corporate treasury to fund their reelection.
Anti takeover measures that do not deter proxy contests are
poison pill devices
Anti takeover measures that are good deterrents against proxy contests are
staggered boards
buying strategy in which the purchasing company buys all of the selling company’s assets, with the exception of the target company’s stock
Asset Sale
After an asset sale acquisition is completed, the shareholders of the target company
redeem their shares
Poison Pills are also called
Shareholder’s rights plans
In a Shareholder’s Rights plan, the board of directors declares a
dividend of rights to buy additional shares of the company at a discount to the market price
In a Shareholder’s Rights plan, The rights start out with an exercise price that is
far out-of-the-money (often 200% to 300% above the market price)
In a Shareholder’s Rights plan, upon a triggering event, the Rights can be redeemed at
a discount to the stock’s market price, such as a 50% discount
In a Shareholder’s Rights plan, a triggering event can be
a raider acquiring 15% of the company
In a Shareholder’s Rights plan, the rights can be redeemed at a discount for a
limited time (often 10 days)
The purpose of the poison pill is to
- deter the raider from initiating the triggering event, and
- encourage the raider to negotiate with the Board for a better price.
Board of directors can put a poison pill plan into place
without shareholder approval
The rights plan in a target company allows existing shareholders to acquire
a large amount of stock if a buyer acquires more than a set amount of the target’s stock (usually 15%)
in a poison pill, when existing shareholder’s acquire large amounts of stock it
reduces the target’s value owned by the buyer, and makes the acquisition more expensive
A poison pill forces a bidder to negotiate with
the board of directors of the target company instead of the shareholders
When a bidder is forced to negotiate with the board by a poison pill, the board may
find other bidders to help drive up the price
A shareholder’s rights plan does NOT cause
the target’s debt to rise
Staggered boards are usually divided into
three classes in which each class is elected every three years
Usually the by-laws of the corporation mandate that board members may only be removed through
cause or with a supermajority of shareholders
A staggered board makes it difficult for a raider to change the composition of the board in a proxy contest because
only a third of the board members are elected each year
The minimum time it takes to change control of a staggered board is
2 years
Required in order to adopt a staggered board
a majority of shareholder votes
Staggered boards are usually adopted prior
to the initial public offering of a corporation
