What it means
A hostile takeover occurs when a buyer goes directly to the shareholders, offering to buy their shares without the board's agreement. Boards that believe the offer is too low, or that the buyer would harm the business, may use defences to slow the buyer down.
Shark repellents are a set of defences that are put in place before a bid arrives. Common examples include a staggered board, where only a portion of directors are elected each year, so a buyer cannot replace the whole board at once.
Another is a supermajority provision, which requires a very high vote, such as 75%, to approve a merger. A poison pill, formally a shareholder rights plan, lets existing holders buy extra shares at a steep discount if a buyer crosses an ownership threshold, which dilutes the buyer.
Supporters argue that these measures give the board time and bargaining power to negotiate a better price or find a rival bidder. They also say that they protect long-term strategy from short-term pressure.
Critics respond that they can entrench management, protect poor performers and discourage bids that would benefit shareholders. Investors and proxy advisers often review a company's defences when judging its corporate governance.
Companies with strong defences sometimes trade at lower valuations, because buyers see less chance of a takeover premium. In recent decades, many companies have removed some defences after pressure from shareholders.
Takeover defences also interact with the price a bidder is willing to pay. A buyer who must overcome a poison pill or win two board elections faces more cost, delay and uncertainty, so it may offer less or walk away.
This can protect a target that is genuinely worth more, but it can equally shield a company that has been run poorly. The nuance is that these tools are not all equal.
A poison pill can be adopted quickly and withdrawn by the board, while a charter provision usually needs a shareholder vote to remove. Rules differ by country, and some jurisdictions restrict or ban certain defences.
In practice
Real-world examples.
Example
A mid-sized media company adopts a staggered board after receiving unsolicited interest from a larger rival. The change means a buyer would need to win two annual elections before controlling the board.
Example
A family-controlled manufacturer includes a supermajority clause in its charter, so any merger needs 80% approval. The family, which owns a large block of shares, can therefore block any deal it dislikes.
Example
A technology company adopts a shareholder rights plan after an investor quietly accumulates 9% of its shares. The board explains that the plan gives it time to assess any approach, and shareholders vote on whether to renew it.
Formula
Calculation
Bidder's stake after a poison pill = bidder's shares / (existing shares + new shares issued)
Suppose a company has 10,000,000 shares trading at $40, and a bidder has bought 20%, or 2,000,000 shares, which triggers a poison pill. Each other holder can buy one extra share for $20, half the market price. The other holders own 8,000,000 shares, so 8,000,000 new shares are issued and the company raises 8,000,000 x 20 = $160,000,000. Total shares are now 18,000,000, and the bidder's stake falls to 2,000,000 / 18,000,000 = 11.1%, down from 20%.Case study
Seen in the real world.
Calder Pharmaceuticals is an illustrative, fictional company that received an unsolicited offer at $30 per share from a larger rival, when its shares traded at $24. The board believed that the offer undervalued its drug pipeline and adopted a poison pill within days.
The pill gave the board time to speak with other possible buyers and to present its development plan to investors. Another company entered the process and, after negotiation, offered $36 per share, a 20% increase on the first bid.
Shareholders received a higher price, and the board argued that the defence had worked in their favour. The illustrative lesson was that shark repellents can raise the price when used to create time and competition, though the same tools can protect weak management when used to avoid any offer at all.
Watch out
Common mistakes.
- Assuming that shark repellents always protect shareholders, when they can also protect management from accountability.
- Believing that a poison pill makes a takeover impossible, when it makes it more expensive and gives the board time.
- Treating all anti-takeover measures as equally hard to remove, when board-adopted pills and charter provisions differ.
Questions
People also ask.
Where does the term shark repellent come from?
It is a market nickname, from the image of corporate raiders as sharks circling a target company.
Do shark repellents affect share prices?
They can, since buyers may pay less for companies that are harder to acquire, and investors may mark down firms with weak governance.
Are shark repellents legal?
In most places they are legal within limits set by company law and courts, but the rules vary and boards must act in the interests of the company.
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