Legal Definitions - crown-jewel defense

A crown-jewel defense is a strategic maneuver employed by a company to prevent a hostile takeover. It involves the company identifying its most valuable or essential assets – its "crown jewels" – and arranging to sell them to a friendly third party if an unwanted acquisition attempt materializes. The goal is to make the company significantly less appealing or valuable to the hostile bidder, thereby discouraging the takeover attempt.

Here are some examples to illustrate this concept:

• Example 1: Biotech Firm's Patent

  Imagine "BioGenius Labs," a small but innovative biotech firm that holds the exclusive patent for a groundbreaking new drug compound, which represents the vast majority of its market value. A larger pharmaceutical conglomerate, "PharmaCorp," launches a hostile bid to acquire BioGenius, primarily to gain control of this highly lucrative patent.

  In response, BioGenius's board, having anticipated such a move, activates a pre-arranged agreement with a university research foundation. This agreement stipulates that if a hostile takeover bid proceeds, BioGenius will sell the exclusive rights to its drug patent to the foundation for a nominal fee, with a clause for BioGenius to license it back if it remains independent. By preparing to divest its most valuable asset (the patent) to a friendly third party, BioGenius makes itself far less attractive to PharmaCorp, whose main interest was the patent itself. This illustrates the crown-jewel defense because the company is willing to sacrifice its "crown jewel" to deter the hostile suitor.

• Example 2: Specialized Manufacturing Plant

  "Precision Robotics Inc." is a specialized manufacturer renowned for its state-of-the-art automated factory, which allows it to produce highly complex components at an unmatched speed and cost. This facility is its core competitive advantage. A competitor, "Global Machines Corp.," initiates a hostile takeover attempt, primarily to acquire Precision Robotics' advanced manufacturing capabilities and eliminate a rival.

  Precision Robotics' management had a contingency plan in place. They had an agreement with a private equity firm to sell their advanced manufacturing facility and its proprietary automation blueprints to the firm at a pre-determined price, should Global Machines' hostile bid proceed. The advanced manufacturing facility is Precision Robotics' "crown jewel." By agreeing to sell this asset to a third party upon a hostile bid, Precision Robotics significantly reduces its appeal to Global Machines, who would no longer gain the primary asset they sought, thus demonstrating a crown-jewel defense.

• Example 3: Media Company's Content Rights

  "StreamVerse Media" owns the exclusive streaming rights to a highly popular and lucrative sports league, which accounts for a significant portion of its subscriber base and revenue. A larger media conglomerate, "MegaMedia Group," launches a hostile takeover bid, largely driven by the desire to control these exclusive sports rights.

  StreamVerse's board had previously negotiated a conditional agreement with the sports league itself. This agreement stipulated that if StreamVerse were to be acquired by a hostile party, the exclusive streaming rights would automatically revert to the league, which could then sell them to another broadcaster. The exclusive streaming rights are StreamVerse's most valuable asset, its "crown jewel." By arranging for these rights to be lost or transferred if a hostile takeover occurs, StreamVerse makes itself a much less attractive target for MegaMedia Group, whose primary motivation was to acquire those very rights. This is a clear application of the crown-jewel defense.