Legal Definitions - takeover defense

A takeover defense refers to any strategy or action a company employs to prevent or discourage an unwanted acquisition, often called a "hostile takeover." These measures are designed to make the company less attractive or more difficult to acquire for a potential bidder.

There are generally two main types of takeover defenses:

• Structural takeover defense: This involves legal mechanisms or provisions embedded within a company's corporate charter or bylaws. These defenses are adopted proactively and do not typically have an immediate financial or operational impact on the company unless a takeover attempt occurs. They are designed to make it harder for a bidder to gain control even if they acquire a significant number of shares.

• Transactional takeover defense: This involves specific financial or operational actions taken by a company, often in response to an actual or anticipated takeover bid. These actions are designed to make the company less appealing to a bidder by increasing the cost of acquisition, reducing the target's value, or making it more difficult to integrate the acquired company.

Here are some examples illustrating these concepts:

• Example 1 (Structural Takeover Defense): A publicly traded software company amends its corporate bylaws to implement a "staggered board" structure. Under this provision, only a fraction of the company's board of directors (e.g., one-third) is up for election each year, rather than the entire board. This makes it impossible for a hostile bidder, even if they acquire a majority of the company's shares, to immediately replace the entire board and gain full control. Instead, it would take several annual shareholder meetings to elect a majority of their own directors, giving the current management more time to respond or find alternative solutions.

• Example 2 (Transactional Takeover Defense): A struggling retail chain, anticipating a hostile takeover bid from a larger competitor, decides to sell off its most profitable and rapidly growing e-commerce division to a friendly third-party investor. This action significantly reduces the overall attractiveness of the retail chain to the hostile bidder, as the primary asset and growth engine they were interested in acquiring is no longer part of the target company. The hostile bidder's potential profit from the acquisition would be substantially diminished.

• Example 3 (Transactional Takeover Defense): A pharmaceutical company facing an unsolicited takeover offer takes out a substantial loan and uses the proceeds to fund a large, one-time special dividend to its existing shareholders. This move increases the company's debt load and reduces its cash reserves, making it a less financially appealing target for the potential acquirer. The bidder would inherit a company with higher liabilities and less available cash, thereby increasing the effective cost of the acquisition and potentially reducing the profitability of the deal.