M&A Flashcards
Must defensive actions of a board of directors be reasonably proportionate to the threat posed to the corporation in a takeover attempt?
Yes. There are several steps for determining if defensive actions are reasonable.
First, there must be a threat. The belief that an all cash for all shares offer is undervalued or subject to substantive coercion is a valid cognizable threat. Substantive coercion is the threat that shareholders will accept an inadequate offer based on a mistaken belief about the board’s assessment of intrinsic value of the corporation.
Second, defensive actions must not be draconian. Draconian actions constitute coercive or preclusive restrictions on shareholder voting rights.
Third, the defensive actions must be proportionate to the threat and fall within a range of reasonableness. Factors to consider for reasonableness of a board’s decision include the board’s authority to routinely make the decision in a nontakeover situation, the degree or magnitude of the threat compared to the response, and whether the board properly recognized the needs of shareholders.
Boards must not be permitted to take unreasonable defensive actions that limit shareholder participation and voting.
