Defensive Measures

Question 1

White night transactions

Answer 1

For the target to arrange a defensive acquisition with a more compatible corporation. (finding a white night to act as a friendly suitor)

A variation is the gray night. An unsolicited competing suitor that is viewed more favorably by target management than the initial aggressor

Question 2

Break up fees

Answer 2

When a company has found a friendly suitor, frequently the merger agreement will contain break up fees or termination fees that would increase the cost of backing out of the deal for another deal or for any other reason

A related device is a topping fee which imposes a surcharge should the target company decide to go with a better offer

Question 3

Lock up arrangements

Answer 3

Target companies sometimes encumber the assets that the suitor is seeking by negotiating a “lock up” arrangement which is a contract to sell assets or transfer control to a 3d party

One variation is a non-termination clause which keeps the merger agreement open, making the target company unavailable to other suitors for a period of time

Question 4

Sale of crown jewels

Answer 4

Dispose of the sought after assets (the acquisition is no longer attractive)

Question 5

Acquisition of assets; scorched earth

Answer 5

The target company may acquire assets that make it a less desirable target

• The potential target can acquire a radio or television station or assets pertaining to another regulated industry that will require regulatory approval of the acquisition
• An extreme version is for the target to destroy the company as it previously existed (scorched earth defense)

Question 6

Diluting shares

Answer 6

Issuing additional shares, the effect is to dilute the aggressor’s control resulting from shares already acquired

Question 7

Defensive shares repurchase program

Answer 7

An alternative to issuing additional shares is for the target to repurchase some of its own shares

Designed to drive the target company’s stock higher than the aggressor’s offer and thus price the aggressor out of the market

Question 8

Greenmail (Unocal case)

Answer 8

Management of the target company may pay off the aggressor to walk away and give up the battle
Usually done through a repurchase of shares from the aggressor at a premium over what was paid

Question 9

Shark repellant and porcupine provisions

Answer 9

There are a variety of restrictive provisions that can be placed into the articles of incorporation that make an unwanted acquisition more difficult (shark repellant or porcupine provisions)

• The establishment of a staggered board with a large number of directors so that it takes several years to elect a new majority
• Erect barriers to a second step transaction

Question 10

Golden parachutes

Answer 10

Provide for extraordinarily high severance payments to target management in the event they are ousted as part of a takeover
- The Internal Revenue Code imposes tax payments on excessive parachute payments and also limits the deductibility of high parachute payments

Question 11

Litigation

Answer 11

If the situation permits, the target management may institute litigation to delay the proposed acquisition
- Challenge the acquisition through an antitrust suit, the federal securities laws, or state corporate statutes

Question 12

Pac-man

Answer 12

The target responds by trying to acquire the aggressor

Question 13

Poison pills

Answer 13

Makes the target difficult, if not lethal to swallow

Question 14

Going to the legislature

Answer 14

Go to the target company’s home state legislature to block an unwanted acquisition.
- A target incorporated in a state where it does substantial business may be able to convince the legislature that a threatened takeover will pose threats to jobs in the state

Question 15

Unocal Corp. v. Mesa Petroleum Co. (1985) summary

Answer 15

Plaintiff was a corporation led by a well-known corporate raider. Plaintiff offered a two-tier tender offer wherein the first tier would allow for shareholders to sell at $54 per share and the second tier would be subsidized by securities that the court equated with “junk bonds”. The threat therefore was that shareholders would rush to sell their shares for the first tier because they did not want to be subject to the reduced value of the back-end value of the junk securities. Defendant directors met to discuss their options and came up with an alternative that would have Defendant corporation repurchase their own shares at $72 each. The Directors decided to exclude Plaintiffs from the tender offer because it was counterintuitive to include the shareholder who initiated the conflict. The lower court held that Defendant could not exclude a shareholder from a tender offer.

Directors have a duty to protect the corporation from injury by third parties and other shareholders, which grants directors the power to exclude some shareholders from a stock repurchase.

Question 16

Unocal Corp. v. Mesa Petroleum Co. (1985) rule

Answer 16

Before the business judgment rule is applied to a board’s adoption of a defensive measure, the burden will lie with the board to prove (a) reasonable grounds for believing that a danger to corporate policy and effectiveness existed; and (b) that the defensive measure adopted was reasonable in relation to the threat posed.