Page 48 - FINAL CFA II SLIDES JUNE 2019 DAY 6

LOS 25.f: Distinguish among pre-offer and post-offer
takeover defense mechanisms. READING 25: MERGERS AND ACQUISITIONS

Pre-Offer Defense Mechanisms
MODULE 25.1: MERGER MOTIVATIONS
Poison pill -gives current shareholders the right to purchase additional shares of stock at extremely attractive prices (i.e., at a discount to current market
value), which causes dilution and effectively increases the cost to the potential acquirer.
• flip-in pill, where the target company’s shareholders have the right to buy the target’s shares at a discount, and
• a flip-over pill, where the target’s shareholders have the right to buy the acquirer’s shares at a discount.

Poison put. These puts give bondholders the option to demand immediate repayment of their bonds if there is a hostile takeover. This additional cash
burden may fend off a would-be acquirer.

Restrictive takeover laws. Some US states are more target friendly than others when it comes to having rules to protect against hostile takeover attempts.
Companies that want to avoid a potential hostile merger offer may seek to reincorporate in a state that has enacted strict anti-takeover laws.

Staggered board. Board of directors is split into roughly three equal-sized groups. Each group is elected for a 3-year term in a staggered system. In any
particular year, a bidder can win at most one-third of the board seats. It would take a potential acquirer at least two years to gain majority control of the
board since the terms are overlapping for the remaining board members. This is usually longer than a bidder would want to wait and can deter a potential
acquirer.

Restricted voting rights. Equity ownership above some threshold level (e.g., 15% or 20%) triggers a loss of voting rights unless approved by the board of
directors. This greatly reduces the effectiveness of a tender offer and forces the bidder to negotiate with the board of directors directly.

Supermajority voting provision for mergers. Requires shareholder support in excess of a simple majority. For example, a supermajority provision may
require 66.7%, 75%, or 80% of votes in favor of a merger. Therefore, a simple majority shareholder vote of 51% would still fail under these supermajority
limits.

Fair price amendment. A fair price amendment restricts a merger offer unless a fair price is offered to current shareholders. This fair price is usually
determined by some formula or independent appraisal.

Golden parachutes. Golden parachutes are compensation agreements between the target and its senior management that give the managers lucrative
cash payouts if they leave the target company after a merger. In practice, payouts to managers are generally not big enough to stop a large merger deal,
but they do ease the target management’s concern about losing their jobs.