Class 4 powerpoint Flashcards
tobin’s queue
global market value divided by the replacement cost
replacement cost: replacement of obsolete machines for example
–> relevant because of certain sector’s characteristics
The management entrenchment hypothesis
preconizes that nonparticipating shareholders lose wealth when management takes actions to deter attempts to take control of the firm
opposite to the The shareholder interest hypothesis
The shareholder interest hypothesis
shareholders gain wealth when managers takes actions to prevent changes in control
opposite of The management entrenchment hypothesis
As board ownership on the firm increases, shareholder wealth generally increases or decreases
increases except for a specific interval
Rights of Targets’ Boards to Resist Under US laws and Canada
Under US laws, boards see their resistance as fiduciary activities
in Canada the laws are more shareholder rights-oriented and boards are restrained in their defensive actions
true or false
In the first years after a firm goes public, takeover defenses could actually consolidate the bond between the firm and relevant stakeholders
true
A corporate profile
a document that outlines the firm’s potential vulnerability and proposes ways to tackle hostile bids
what could an unexpected increase in trading volume signal?
a hostile takeover
it could mean a lot of stuff such as earnings
The most frequent preventive measures to hostile takeovers are
Poison pill
corporate charter amendments
Poison pill
Securities issued by a potential target to render the firm less valuable from the hostile bidder viewpoint
corporate charter amendments
The target firm may enact several amendments in its corporate charter so as to toughen a change in managerial control
–> precognizes that management is a bad evil
A preferred stock plan
represents shares of a target firm that could be converted into a fixed amount of shares of an acquirer if a takeover occurred
two drawbacks of a referred stock plan
The issuer could only redeem those shares after a substantial amount of time
Analysts often group preferred shares with debt when assessing a firm’s leverage
Flip-over poison pills
rights allowing the holders to buy shares of an acquirer at a low price
–> they are distributed as dividends and become active following a triggering event
Legality of Poison Pills
In Moran v. Household International, the Delaware Supreme Court rules that the pills do not keep bidders away, but rather favour target firms the chance to seek higher bids
In Unitrin v. America General Corp., the court does not bother with the target’s (i.e., Unitrin’s) use of poison pills, albeit it raises other issues with the target’s action to the unwanted bid
In Moore Corp. Ltd. v. Wallace Computer Services, Inc., the court favours the use of defences such as poison pills. In fact, the acquirer (i.e., Wallace) faces issues such as staggered board and shareholder support for the hostile bid
who uses more poison pills between large and small firms
Today, poison pills are less used by big firms, and more used by smaller firms
Shadow pill
stands for the adoption of a pill after a bid has taken place or an activist has targeted the firm
On-the-shelf plans
plans that are ready to be carried out depending on the type of threat perceived by the board
The issuing dynamics of Poison Pills
Issuance through a dividend of one right for each stock shareholders own (redeemable for 1¢ to 5¢)
Right plans are normally authorized by the board without shareholder approval
the Rights (poison pills stuff)
Prior to the triggering event, the rights trade with the common shares and separate rights certificates are not issued
the bidder does not enjoy the benefits of the rights
Certain large shareholders with high ownership may be grandfathered by the target firm
true or false
A poison pill plan may exempt specific qualified offers (e.g., all-cash considerations, and minimum offer price)
true
A chewable pill (or qualified offer provision)
a shareholder vote on whether a specific takeover bid would be covered by the firm’s poison pill
Net operating losses (NOLs)
tax losses that can be used to counterbalance profits two years past and up 20 years forward
according to the IRS, when do ownership changes occur
when 50% or more of the shares change ownership over a three-year period
(it applies only to shareholders who got 5%+ of shares outstanding during that period)
