Application of takeover protections: Overview, definition, and example
What are the application of takeover protections?
Takeover protections refer to various strategies, provisions, or defenses used by a target company to prevent or discourage hostile takeovers or acquisitions. These protections are typically included in a company’s corporate governance structure or in its charter, bylaws, or shareholder agreements. Takeover protections are designed to give the target company’s management the ability to reject or resist an unsolicited offer to buy the company, allowing them to protect the company’s independence and long-term strategy.
Some common takeover protection mechanisms include poison pills, golden parachutes, staggered boards, and supermajority voting requirements. These defenses make it more difficult or expensive for an acquiring company to gain control over the target company without the approval of the board or shareholders.
Why is the application of takeover protections important?
The application of takeover protections is important because it allows a company to defend itself against hostile takeover attempts that might not be in the best interests of the company, its employees, or its long-term strategy. Takeover protections provide management with time to explore alternative options, such as seeking a better offer, negotiating terms, or putting in place a shareholder-friendly strategy.
For shareholders, takeover protections can help prevent a forced sale of the company that may undervalue their shares or not align with their long-term interests. For management, these protections offer a way to maintain control and preserve the company’s vision and direction without being subject to an unwanted acquisition that may disrupt operations or leadership.
Understanding the application of takeover protections through an example
Imagine a public company that receives a hostile takeover bid from a competitor. To protect itself from this unwanted acquisition, the company’s board activates a poison pill provision. This provision allows existing shareholders (except the acquiring company) to purchase additional shares at a discounted price, diluting the potential acquirer’s stake and making the takeover more expensive and less attractive. The company may also use a staggered board structure, where only a portion of the board of directors is up for election at a time, making it more difficult for an acquirer to gain control of the board.
In another example, a company has a golden parachute agreement with its executives, which ensures that top management will receive substantial severance packages in the event of a takeover. This provision can discourage hostile bidders, as the acquirer may have to bear the cost of these severance benefits when acquiring the company.
An example of a takeover protection clause
Here’s how a takeover protection clause might look in a company’s charter or shareholder agreement:
“In the event of any unsolicited attempt to acquire control of the Company, the Board of Directors is authorized to take any and all actions necessary to protect the interests of the Company and its shareholders, including the activation of the Company’s poison pill provision, the issuance of additional shares to current shareholders, and the implementation of any other defenses available under applicable law. The Company may also require a supermajority vote of the shareholders for any proposed acquisition or merger.”
Conclusion
The application of takeover protections is a critical tool for companies to defend against hostile takeovers that may not align with their long-term goals or the interests of their stakeholders. By utilizing provisions such as poison pills, staggered boards, or golden parachutes, companies can retain control and ensure that any acquisition offers are thoroughly evaluated and in the best interests of the company and its shareholders. Takeover protections help maintain stability and protect the company’s strategic direction, allowing it to focus on long-term growth and development without the disruption of an unsolicited acquisition.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.