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Fina 415 > #5- Ch. 5- antitakeover measures > Flashcards

#5- Ch. 5- antitakeover measures Flashcards

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1
Q

What are the two types of antitakeover measures?

A

Preventative and Active

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2
Q

What is the management entrenchment hypothesis?

A

A theory suggesting that management may resist takeovers to protect their positions rather than in the best interest of shareholders

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3
Q

What is the shareholder interests hypothesis?

A

A theory indicating that management’s actions should align with maximizing shareholder value

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4
Q

List three common preventative defenses (shark repellants).

A
  • Poison pills
  • Corporate charter amendments
  • Golden parachutes
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5
Q

What is a poison pill?

A

A strategy to make a takeover less attractive to the bidder, often through shareholder rights plans

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6
Q

How many companies had poison pills as of late December 1990?

A

Over 1,500 companies

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7
Q

What percentage of the Fortune 500 companies had poison pills?

A

56%

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8
Q

What is a formal poison pill also known as?

A

Shareholder Rights Plan

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9
Q

What is the meaning of the term ‘poison pill’?

A

The acquirer must deal with negative consequences if they take over the target

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10
Q

What is a shadow pill?

A

A poison pill that does not need to be pre-existing

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11
Q

Define a chewable pill.

A

A pill that disappears or is redeemable by shareholders, rather than only by boards

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12
Q

What triggers a typical poison pill?

A

When a shareholder buys a certain percentage of the company’s shares, such as 20%

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13
Q

Who perfected the poison pill in 1985?

A

Martin Lipton

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14
Q

What was the first poison pill case?

A

Brown Forman Distillers v. Lenox Inc.

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15
Q

In the Brown Forman case, what was the offer price per share?

A

$87 per share

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16
Q

What was the outcome of the Brown Forman and Lenox case?

A

Brown Forman acquired Lenox but reached a compromise on future direction

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17
Q

What type of poison pill allows shareholders to buy shares at a discount after a triggering event?

A

Flip Over

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18
Q

What is a flip-in poison pill?

A

Allows holders to buy shares in the target at a discount after a triggering event

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19
Q

What are supermajority provisions?

A

Charter amendments requiring more than a majority vote for certain actions, often 80% approval

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20
Q

What is a staggered board?

A

A board structure where directors are elected in phases, preventing a takeover from succeeding quickly

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21
Q

Define dual capitalization.

A

The existence of multiple classes of stock, often with one class having super voting rights

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22
Q

What is antigreenmail?

A

Provisions that prohibit the payment of greenmail

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23
Q

What is greenmail?

A

Payment of a premium to buy shares from threatening shareholders

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24
Q

What is a white knight?

A

A friendly buyer preferred over a hostile bidder

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25
What is the purpose of fair price provisions?
To ensure that bidders pay a fair price for shares acquired
26
What legal case challenged the legality of discriminatory self-tenders?
Boone Pickens v. Unocal
27
What was the outcome of the Delaware Supreme Court ruling on discriminatory self-tenders?
They were ruled legal until the law was changed to make them illegal
28
What is a lock-up option?
An option that gives a buyer the right to purchase certain assets at an attractive price
29
In the Pantry Pride v. Revlon case, what did the Delaware Court rule about lock-up options?
They were deemed illegal as they breached the board's fiduciary responsibility
30
What is a standstill agreement?
Payment to a threatening shareholder not to acquire any additional shares
31
True or False: Poison pills prevent a firm from receiving a tender offer.
False
32
What are the two main categories of antitakeover defenses?
Preventative defenses and active defenses.
33
What is the goal of preventative antitakeover defenses?
Make the company less attractive or harder to acquire before a takeover attempt.
34
What is the goal of active antitakeover defenses?
Fight off an ongoing hostile takeover attempt.
35
What is a poison pill?
A shareholder rights plan making the company costly or unattractive to acquire.
36
When is a typical poison pill triggered?
When one shareholder buys 20% or more of the company.
37
What is a flip-in poison pill?
Allows existing shareholders (except the acquirer) to buy target shares at a discount.
38
What is a flip-over poison pill?
Allows shareholders to buy shares of the combined company at a discount after a merger.
39
Who is credited with perfecting the poison pill?
Martin Lipton.
40
What is a chewable poison pill?
A poison pill that can be redeemed or nullified by shareholders.
41
What is a shadow poison pill?
A poison pill plan that is drafted but not formally adopted until a threat appears.
42
What was the first case of a poison pill being used?
Brown-Forman Distillers vs. Lenox Inc.
43
How did the Brown-Forman poison pill work?
Lenox issued preferred shares convertible into 40 shares of Brown-Forman upon takeover.
44
What were two problems with early poison pills?
Difficult to redeem and harmful to the balance sheet.
45
How did Goldsmith defeat Crown Zellerbach’s poison pill?
By making only a partial acquisition below the trigger level.
46
What is a voting plan as a poison pill?
Issuing preferred shares that grant super voting rights upon a hostile bid.
47
What court decision approved the legality of poison pills?
Household International Decision (Delaware Supreme Court, 1985).
48
What is the purpose of a corporate charter amendment as a defense?
To embed rules making hostile takeovers more difficult.
49
What is a supermajority provision?
Requires a high percentage (often 80%) shareholder approval for takeovers.
50
What is a staggered board?
A board where only a fraction of directors are elected each year.
51
How does a staggered board defend against takeovers?
Prevents full board replacement in one election cycle.
52
What is dual capitalization?
Issuing multiple classes of stock with different voting rights.
53
How do dual class shares defend against takeovers?
Concentrate voting power in the hands of founders or insiders.
54
What is a fair price provision?
Requires the bidder to pay a set 'fair price' for all shares in a merger.
55
What are examples of fair price definitions?
Highest price paid recently or a multiple of past stock prices.
56
What is reincorporation as a defense strategy?
Moving the firm’s legal home to a state with strong antitakeover laws.
57
What is greenmail?
Paying off a hostile shareholder to go away.
58
What is an antigreenmail provision?
A charter rule prohibiting greenmail payments without shareholder approval.
59
What are standstill agreements?
Deals where a hostile shareholder agrees to not increase their ownership.
60
What is a white knight?
A friendly bidder who rescues the target from a hostile acquirer.
61
What is a white squire?
A friendly investor buying a minority stake to block hostile bids.
62
What are lock-up transactions?
Selling valuable assets to friendly parties to make the firm less attractive.
63
What is a lock-up option?
Giving a favored bidder an option to buy key assets cheaply if another wins.
64
What defense tactic backfired in the Revlon case?
Lock-up options favoring Forstmann Little were ruled illegal.
65
What is the Pac-Man defense?
The target makes a counter-offer to acquire the hostile bidder.
66
What capital structure change can deter a takeover?
Issuing more debt to reduce available free cash.
67
What is a self-tender offer?
When the target buys back its own shares to consolidate control.
68
What is discriminatory self-tendering?
Buying back shares selectively from certain shareholders.
69
What did the Unocal decision say about discriminatory tenders?
Initially allowed but later regulated more strictly.
70
What is the risk of issuing too much debt as a defense?
Financial distress and bankruptcy risk increase.
71
What is the purpose of increasing target leverage?
Reduce the cash attractiveness of the company.
72
What is the function of litigation in antitakeover defense?
To delay the hostile bidder and increase deal costs.
73
What does a termination fee achieve?
Discourages competing bids by making rival bids more costly.
74
How does the Revlon duty affect antitakeover measures?
Once a sale becomes inevitable, directors must maximize value, not entrench management.
75
What did the court rule in Rales vs. Interco?
Interco’s use of a poison pill unfairly blocked better shareholder options.
76
What is the household name case that approved poison pills as legal?
Household International.
77
What are the typical triggering thresholds for poison pills?
20% ownership or tender offer for 30% of shares.
78
What is the main difference between flip-in and flip-over pills?
Flip-in allows buying target shares; flip-over allows buying acquirer's shares.
79
What is a fair price statute?
A law requiring fair compensation to shareholders in mergers.
80
Why are poison pills seen as controversial?
They can both protect value and entrench bad management.

Fina 415 (9 decks)

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