In this section we describe various defensive tactics

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In this section, we describe various defensive tactics that have been used by target-firm management to resist unfriendly attempts. The law surrounding these defenses is not settled, and some of these maneuvers may ultimately be deemed illegal or otherwise unsuitable. The Corporate Charter The corporate charter consists of the articles of incorporation and corporate bylaws that es- tablish the governance rules of the firm. The corporate charter establishes the conditions that allow for a takeover. Firms frequently amend corporate charters to make acquisitions more difficult. For example, usually, two-thirds (67 percent) of the shareholders of record must approve a merger. Firms can make it more difficult to be acquired by changing this required percentage to 80 percent or so. Such a change is called a supermajority amendment . Another device is to stagger the election of the board members. This makes it more difficult to elect a new board of directors quickly. Such a board is sometimes called a clas- sified board. Repurchase and Standstill Agreements Managers of target firms may attempt to negotiate standstill agreements . Standstill agree- ments are contracts wherein the bidding firm agrees to limit its holdings in the target firm. These agreements usually lead to the end of a takeover attempt. Standstill agreements often occur at the same time that a targeted repurchase is ar- ranged. In a targeted repurchase, a firm buys a certain amount of its own stock from an individual investor, usually at a substantial premium. These premiums can be thought of as payments to potential bidders to eliminate unfriendly takeover attempts. Critics of such payments view them as bribes and label them greenmail . Poison Pills and Share Rights Plans A poison pill is a tactic designed to repel would-be suitors. The term comes from the world of espionage. Agents are supposed to bite a pill of cyanide rather than permit capture. Pre- sumably, this prevents enemy interrogators from learning important secrets.
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17 In the equally colorful world of corporate finance, a poison pill is a financial device designed to make it impossible for a firm to be acquired without management’s consent— unless the buyer is willing to commit financial suicide. A majority of the largest firms in the United States have adopted poison pill provisions of one form or another, often calling them share rights plans (SRPs) or something simi- lar. SRPs differ quite a bit in detail from company to company; we will describe a kind of generic approach here. In general, when a company adopts an SRP, it distributes share rights to its existing stockholders. These rights allow shareholders to buy shares of stock (or preferred stock) at some fixed price. The rights issued with an SRP have a number of unusual features. First, the exercise or subscription price on the right is usually set high enough so that the rights are well out of the money, meaning that the purchase price is much higher than the current stock price. The rights will often be good for 10 years, and the purchase or exercise
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  • Spring '12
  • Scott
  • Firm, Firm B

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