What it means
In a hostile takeover, a bidder goes directly to shareholders to buy enough shares to take control against the board's wishes. The target may look for a ready ally to counter this.
A white squire is that ally: a friendly investor who buys a significant block of shares, often newly issued, and agrees to vote in line with the board. The company usually offers the squire special terms to make the deal attractive.
These can include a discount on the share price, preferred shares with extra voting power, or a seat on the board. In return, the squire agrees to a standstill, which means not to increase its stake beyond a limit, and not to sell to the bidder.
The tactic works because it changes the arithmetic of the takeover. New shares increase the total number outstanding, which reduces the bidder's percentage, and the squire's block removes a large number of shares from those available to the bidder.
The bidder must now buy more from the remaining shareholders or raise its offer. The approach differs from a white knight, who comes in to buy the entire company on friendlier terms.
A white squire wants only a minority stake, so the company keeps its independence. That is attractive to boards, but existing shareholders may object if the shares are sold cheaply, because their own holdings are diluted.
Rules vary by country. Some legal systems and stock exchanges restrict defensive moves taken without shareholder approval, and courts may examine whether the board acted in the interests of shareholders.
Companies should therefore take legal advice and be able to show that the deal was fair. Disclosure and approval are the final points to check.
Listed companies usually need to announce a significant share issue promptly, and in many markets existing shareholders have rights of first refusal. A board that follows the rules and explains its reasoning is far better placed if the deal is later challenged.
In practice
Real-world examples.
Example
A regional bank faces an unsolicited bid from a larger rival. The board sells newly issued shares to a long-standing insurance partner that agrees to vote with the board, giving the bank time to consider alternatives.
Example
A family-controlled retailer fears that an activist investor will take control. It invites a friendly pension fund to buy a 15% stake with a standstill agreement, which strengthens the board's position.
Example
A technology company receives a hostile offer and negotiates with a larger supplier to buy a block of preferred shares. The deal also includes a supply contract, so the company gains a business benefit as well as a defence. The board must still show that the terms are fair to existing shareholders.
Formula
Calculation
Ownership percentage = shares held / total shares outstanding
Suppose a target has 100,000,000 shares outstanding, and a hostile bidder already holds 35,000,000 shares, which is 35%. The company issues 20,000,000 new shares to a white squire, so total shares become 100,000,000 + 20,000,000 = 120,000,000. The squire owns 20,000,000 / 120,000,000 = 16.67%, and the bidder's stake falls to 35,000,000 / 120,000,000 = 29.17%. To win a simple majority of more than 60,000,000 shares, the bidder now needs over 25,000,000 more shares instead of the 15,000,000 it needed before.Case study
Seen in the real world.
Calder Freight is an illustrative, fictional logistics company that received an unwelcome offer from a competitor, Strand Transport, which had quietly built a 30% stake. The board believed the offer undervalued the company and looked for an ally.
It issued new shares equal to 15% of its existing share capital to a friendly investment fund at a small discount. The fund agreed to a five-year standstill and to support the board's recommendations, while Strand's stake was diluted from 30% to about 26%, because 30 / 115 is roughly 26%, and the fund held 15 / 115, or about 13%.
Strand eventually raised its bid by 12%, which the board accepted because the higher price was fairer. The illustrative lesson is that a white squire often works not by blocking a deal for ever, but by giving the board time and bargaining power to obtain a better price.
Watch out
Common mistakes.
- Confusing a white squire with a white knight, when the squire takes a minority stake and the knight buys the whole company.
- Ignoring the dilution that existing shareholders suffer when new shares are sold at a discount.
- Assuming the board can always use the defence freely, when many jurisdictions require shareholder approval or limit defensive actions.
Questions
People also ask.
Why would an investor agree to be a white squire?
It may receive discounted shares, preferred terms or a commercial relationship with the company, in return for supporting the board.
Does a white squire guarantee the takeover fails?
No, it makes the bid harder and gives the board time, but a determined bidder may raise its offer or buy more shares from others.
What is a standstill agreement?
It is a contract in which the investor promises not to buy more than a set number of shares or to sell to the bidder.
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