Shark Repellent

shark repellent

‘Poison pill’ is sometimes used more broadly to describe other types of takeover defenses that involve the target taking some action.

Although the broad category of takeover defenses (more commonly known as ‘shark repellents‘) includes the traditional shareholder rights plan poison pill. Other anti-takeover protections include: Limitations on the ability to call special meetings or take action by written consent; Supermajority vote requirements to approve mergers; and Supermajority vote requirements to remove directors.

Additionally, the target may add to its charter a provision which gives the current shareholders the right to sell their shares to the acquirer at an increased price (usually 100% above recent average share price), if the acquirer’s share of the company reaches a critical limit (usually one third). This kind of poison pill cannot stop a determined acquirer, but ensures a high price for the company. In other forms of shark repellent: The target takes on large debts in an effort to make the debt load too high to be attractive—the acquirer would eventually have to pay the debts; or The company buys a number of smaller companies using a stock swap, diluting the value of the target’s stock.

The target can grant its employees stock options that immediately vest if the company is taken over. This is intended to give employees an incentive to continue working for the target company at least until a merger is completed instead of looking for a new job as soon as takeover discussions begin. However, with the release of the ‘golden handcuffs,’ many discontented employees may quit immediately after they’ve cashed in their stock options. This poison pill may create an exodus of talented employees. In many high-tech businesses, attrition of talented human resources often means an empty shell is left behind for the new owner.

Peoplesoft guaranteed its customers in 2003 that if it were acquired within two years, presumably by its rival Oracle Corporation, and product support were reduced within four years, its customers would receive a refund of between two and five times the fees they had paid for their Peoplesoft software licenses. The hypothetical cost to Oracle was valued at as much as US$1.5 billion. Peoplesoft allowed the guarantee to expire in 2004. If PeopleSoft had not prepared itself by adopting effective takeover defenses, it is unclear if Oracle would have significantly raised its original bid of $16 per share. The increased bid provided an additional $4.1 billion for PeopleSoft’s shareholders.

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