New on FinoLib · Volume II: Capital Markets
I have just published a new article on FinoLib, my free finance education library: Hostile Takeovers and Defense Mechanisms Explained. It is part of Volume II: Capital Markets. Below is a summary of the topic in plain, expert language, so you can follow the idea even before you open the full article.
The idea in plain words
In a hostile takeover the bidder goes around the company’s board, either by offering to buy shares directly from shareholders, called a tender offer, or by trying to replace the directors in a proxy fight. The board can fight back with defenses such as a poison pill, a staggered board, a friendly rival bidder called a white knight, and golden parachutes for managers. In Delaware, courts judge whether the defense was proportionate. In India, SEBI’s 25% open-offer trigger and limits on issuing shares leave poison pills unavailable.
Key points
■US clocks: Schedule 13D within five business days of crossing 5%, tender offers open at least 20 business days, Section 203’s three-year bar at 15%.
■A flip-in pill at 15% costs a raider about 23% of its stake value, so pills are almost never triggered.
■Airgas (2011) showed that a pill plus a staggered board can hold off a cash bid for well over a year.
■Revlon requires a board that decides to sell control to seek the best available price.
A closer look
When a target’s board rejects an acquirer’s approach, a determined acquirer can go directly to shareholders through a tender offer (offering to buy shares directly from shareholders at a premium to the market price) or a proxy fight (trying to win shareholder votes to replace the target’s board with directors sympathetic to the deal). Target boards have developed a recognizable toolkit of defenses:
A worked example
Worked Example — What a Poison Pill Does to a Raider
A target has 100 million shares at $50 ($5,000 million). Its rights plan “flips in” at 15%: once a holder crosses it, every other holder may buy one new share per share held at $25. A raider buys 15 million shares ($750 million), triggering it. Other holders buy 85 million new shares for 85 × $25 = $2,125 million. Value per share = (5,000 + 2,125) ÷ (100 + 85) = $38.51. Raider: 15 ÷ 185 = 8.1%, worth 15 × 38.51 = $577.7 million: a $172.3 million (23%) loss, gained by the other holders at $13.51 per right.
Under the hood
Under the Hood: The US Rulebook, Clock by Clock
A bidder crossing 5% of a public company’s voting shares, intending to influence control, files a Schedule 13D within five business days (cut from ten calendar days in October 2023). A tender offer must stay open at least 20 business days, plus 10 more after any price change (Rule 14e-1). Under Delaware’s Section 203, a buyer crossing 15% without prior board approval cannot merge with the company for three years unless it reaches 85% in that transaction or wins the board plus two-thirds of other holders. Unocal (1985) requires a real threat and a proportionate defense; Moran v.
Decision rule
Target board: use the pill to buy time and price, not to say no forever. If an offer is below your documented standalone value range, keep the pill and show shareholders the gap; if it is inside the range, or you have decided to sell, Revlon points to a process for the best price. Bidder: never cross a pill; go around it with a premium that creates shareholder pressure or a proxy contest (two annual meetings with a staggered board).
The costliest mistake
Assuming a pill is a bluff: the raider above loses 23% at once. In December 2008 Trilogy, a competitor, deliberately bought through Selectica’s 4.99% pill to “force the board to make a decision”; the board issued shares to every other holder, cutting Trilogy’s stake from about 6% to about 3%, and the Delaware Supreme Court upheld it on October 4, 2010 (Versata v. Selectica). Read the rights plan before buying the first share.
Recap
Hostile bidders use tender offers and proxy fights; US boards answer with pills, staggered boards, white knights and parachutes under Delaware’s Unocal and Revlon standards, and a triggered pill costs a raider about 23% of its stake in the example. India’s Takeover Regulations replace that contest with a 25% trigger and a 26% open offer, and its share-issuance rules leave pills unavailable.
What the full article covers
The full article includes worked examples, a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume II: Capital Markets
Read the full article on FinoLib
The complete article, Hostile Takeovers and Defense Mechanisms Explained, with every worked example, diagram, quiz and source, is free to read in Volume II, Capital Markets on finolib.com.
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