Legal Definitions - shark repellent

Shark Repellent

A "shark repellent" refers to a defensive strategy or provision implemented by a company to deter or prevent a hostile takeover bid. These measures are typically embedded in the company's foundational documents, such as its corporate charter or bylaws, making it more difficult or expensive for an acquiring company (often metaphorically called a "shark") to gain a controlling interest without the target company's board approval.

Here are some examples:

• Example 1: The "Poison Pill" (Shareholder Rights Plan)
  Imagine a publicly traded software company, CodeGuard Solutions, implements a "poison pill" provision. This provision states that if any single entity acquires, say, 15% of CodeGuard's shares without the board's consent, all other existing shareholders automatically gain the right to purchase additional shares at a deeply discounted price.
  • How it illustrates the term: This makes a hostile takeover prohibitively expensive for the acquiring entity. Their stake would be significantly diluted, forcing them to buy many more shares at a higher effective cost to achieve control, thereby "repelling the shark."
• Example 2: Staggered Board of Directors
  Consider Evergreen Energy Corp., a large utility company, whose corporate bylaws stipulate that its nine-member board of directors is divided into three classes, with only one class (three directors) coming up for election each year for a three-year term.
  • How it illustrates the term: Even if a hostile bidder acquires a majority of Evergreen Energy's shares, they cannot immediately replace the entire board. They would have to win elections over at least two annual meetings to gain control of the board, giving the current management significant time to find alternative solutions or negotiate a more favorable outcome.
• Example 3: Supermajority Voting Requirement
  Suppose Heritage Brands Inc., a consumer goods company, has a provision in its corporate charter requiring that any merger or acquisition proposal must be approved by at least 75% of the outstanding shares, rather than the standard simple majority (50% plus one share).
  • How it illustrates the term: This "shark repellent" makes it significantly harder for a hostile bidder to secure the necessary votes to complete a takeover, even if they manage to acquire a substantial portion of Heritage Brands' shares. It empowers a minority of shareholders to block the deal, thereby protecting the company from an unwanted acquisition.