This document discusses strategies for defending against hostile takeovers. It begins by outlining warning signs that a takeover may be impending. It then describes several preventative measures companies can take, such as controlling access to shareholder registers and increasing debt, to deter potential acquirers. Finally, it outlines reactive defenses that can be employed once a takeover attempt is underway, like litigation, share buybacks ("Pac-Man defense"), and recruiting a friendly acquirer ("White Knight"). The overall message is that advance preparation and flexibility are key to successfully defending against a hostile takeover.

1. 1818 • The Ukrainian Journal of Business Law | September 2006 •
T
erms such as “poison pill”,
“shark repellent” and
“scorched earth defence”
might conjure up images of
old action movies. Yet they
are more than real in this era of economic
warfare. In this connection designing
strategies for mergers and acquisitions
and planning defences against hostile
takeovers now preoccupy many corpo-
rate managers.
This article examines some of the
steps that a company should take to plan
and implement defence strategy against
unfriendly takeover. It will focus on open
joint stock companies since such com-
panies are usually the battlefield in the
corporate war.
I. The warning signals
There are some signs that tell you that
the hunt for your company has begun
and a predator is coming:
1. Suddenly minority shareholders
start to get interested in the business af-
fairs of the company and start asking for
copies of certain documents.
2. The company becomes the object of
various inspections carried out by bodies
of the state controll that are particularly
interested in reviewing the company’s
register of shareholders, the list of major
clients and creditors, information on as-
sets of the company, etc.
3. The company and its executives be-
come the target of negative publicity.
4. The number of small transactions
in shares of the company has consider-
ably increased.
5. Other companies in your industry
have been attacked by raiders.
6. Unsolicited offers to sell the shares
in the company have been received dur-
ing the last few months.
Katerina S. Kokot is a senior attorney
with PricewaterhouseCoopers
in re
by Katerina S. KOKOT
TheThe ArtArt
of Takeover
DefenceDefence
S.Riabokon

2. 1919• The Ukrainian Journal of Business Law | September 2006 •
takeover defence | in re
7. The company is ambushed with
law suits, often with absurd claims for
protection of the rights of minority share-
holders.
II. Defence techniques
Preventive measures
Preventive measures against hostile
takeovers are much more effective than
reactive measures implemented once
takeover attempts have already been
launched. The first step in a company’s
defence, therefore, is for management
and controlling shareholders to begin
their preparations for a possible fight
long before the battle is joined. There are
several principal weapons in the hands of
target management to prevent takeovers,
some of which are described below.
Control over the register
The raider needs to know who the
shareholders of the target are in order
to approach them with the offer to sell
their shares. With joint stock companies
this information is contained in the share
register. In particular, the share register
provides for the possibility to identify the
owners of the shares, quantity, nominal
value and type of shares held by share-
holders. So it is very important to ensure
that non-authorized persons do not have
access to the share register of the com-
pany by taking the following steps:
• Careful consideration is needed
when choosing the registrar; the pref-
erence should be given to a reputable
registrar;
• Check the track record of the share
registrar in regards to its involvement in
hostile takeovers in the past;
• Check who controls the registrar
company.
In case of transfer of
shares to a nominee holder
(custodian or depository)
information on the ben-
eficiary owners of shares
is not stated in the share
register. Instead, the share
register contains informa-
tion on the nominee hold-
ers1
. This makes it much
more difficult for the raider
to identify who is the real
owner of the shares.
Control over debts
Creditor indebtedness of the company
may be used by a raider as the principal
or auxiliary tool in the process of hostile
takeover. In particular, the raider may
employ so-called “contract bankruptcy”
in order to acquire the assets of the target.
In connection with this the following cau-
tionary measures should be taken:
• Monitor the creditors of company
carefully;
• Prevent overdue debts;
• If there is indirect evidence that
a bankruptcy procedure is about to be
launched, the company should do its best
to pay all outstanding debts;
• Accumulate all the debts and risks
relating to commercial activity of the
company on a special purpose vehicle
that does not hold any substantial assets.
Cross shareholding
Several subsidiaries of a company
(at least three) have to be established,
where the parent company owns 100%
of share capital in each subsidiary. The
parent transfers to subsidiaries the most
valuable assets as a contribution to the
share capital. Then the subsidiaries issue
more shares. The amount of these should
be more than four times the initial share
capital. Subsidiaries then distribute the
shares among themselves. The result of
such an operation is that the parent owns
less that 25% of the share capital of each
subsidiary. In other words the parent
company does not even have a blocking
shareholding. When implementing this
scheme it is important to ensure that the
management of the subsidiaries is loyal
to the parent company. In this way the
raider who proceeds with a takeover may
find himself deprived of the very objec-
tive of his ambitions.
Golden parachute
This measure discourages an un-
wanted takeover by offering lucrative
benefits to the current top executives,
who may lose their job if their company is
taken over by another firm. The “trigger-
ing” events that enable the golden para-
chute clause are change of control over
the company and subsequent dismissal
of the executive by a raider provided
that this dismissal is outside the execu-
tive’s control (for instance, reduction in
workforce2
or dismissal of the head of
the board of directors due to the decision
of the general meeting of shareholders
provided such additional ground for
dismissal is stated in the labour contract
with the head of the board3
).
Benefits written into the executives’
contracts may include items such as
stock options, bonuses, hefty severance
pay and so on. Golden parachutes can be
prohibitively expensive for the acquiring
firm and, therefore, may make undesir-
able suitors think twice before acquiring
a company if they do not want to retain
the target’s management nor dismiss
them at a high price.
The golden parachute defence is
widely used by American companies. The
presence of “golden parachute” plans at
Fortune 1000 companies increased from
35% in 1987 to 81% in 2001, according to
a survey by Executive Compensation Ad-
visory Services. Notable examples include
ex- Mattel CEO Jill Barad’s USD 50 million
departure payment, and Citigroup Inc.
John Reed’s USD 30 million in severance
and USD 5 million per year for life.
1
The nominee holder discloses the beneficial
shareholders to the registrar only in specific
cases set forth in Ukrainian legislation.
2
Under para 3 art. 36 of the Labor Code of
Ukraine (“CLL”) the change of ownership over
the company does not result in termination of
an employee’s labor relations with a company.
However, labor contract may be terminated
by employer in case of reduction in workforce
(clause 1 para 1 art. 40 of CLL). Under Ukrain-
ian legislation and according to court practice,
a company has the right to determine how
many employees it needs and which jobs or
job functions it will keep, so it may not be
called upon to justify its decision in court.
3
Under art. 65 of the Commercial Code of
Ukraine conclusion of a labour contract with
the head of the board of directors is manda-
tory. Under art. 21 of CCL the parties to the
labour contract may agree on, inter alia, term
of the contract, rights, obligations and respon-
sibilities of the parties, grounds for termination
of the labour contract, includ–ing early termi-
nation.
Preventive measures
against hostile takeovers
are more effective
than reactive

3. 2020 • The Ukrainian Journal of Business Law | September 2006 •
Change of control clauses (“Shark
Repellents”)
The company may include in loan
agreements or some other agreements
conditional covenants that in the event of
the company passing under the control of
a third party, the other party to the agree-
ment has the right to accelerate the debt or
terminate the contract. The result of such
agreements is that a potential raider may
not be sure whether it will be able to ben-
efit from important advantages enjoyed
by the target. Although one of the effects
of change of control clauses is to discour-
age raiders, their purpose is legitimate: to
protect creditors from being placed in a
worse position than they visualised.
Post takeover defence
It is essential that the company starts
to react immediately after the takeover
attempt is launched. Otherwise the com-
pany may find itself at a strategic and tac-
tical disadvantage that may prove fatal.
Litigation
Bringing administrative claims or
court proceedings against the raider is
regarded as one of the most common anti-
takeover measures. A target of a hostile
offer should search for any regulatory, se-
curities law or other skeletons in the closet
of the attacker. Court action can consider-
ably lengthen the period of time needed
to complete the takeover and reduce its
chances of success by increasing the cost
and by allowing time for the target to so-
licit competing bids or put up defences.
Self-tender
Under the Business Associations Act
of Ukraine, a joint stock company has the
right to acquire the paid up shares from
the other shareholders only by sums that
exceed the share capital. A corporate
buy-back of its own shares increases the
relative voting power of those sharehold-
ers friendly to management who do not
tender their shares.
However, if the charter of the compa-
ny provides that the decision on buy-back
of own shares falls within the competence
of a general shareholders meeting, self-
tender may prove to be a rather time-
consuming exercise. In such
a case the law requires that of
shareholders should be noti-
fied about the general share-
holders meeting at least 45
days in advance. The period
of time necessary for proper
convening the shareholders
meeting may be enough for
the raider to accumulate a
sufficient quantity of shares
to block the decision on buy-
back of shares.
It should also be kept in
mind that such shares must
be disposed of or cancelled
within a period of one year. During this
period voting and determination of a
quorum on the general shareholders
meeting will be made without taking
into account own shares bought by the
company.
Pacman defence
This defence, named after the video-
game, consists of a counter-purchase
by the target of the shares against its
attacker. In some cases it will suffice to
buy even a small fraction of shares of the
attacker to be able to initiate legal claims
against the attacking company in the ca-
pacity of minority shareholder.
Sometimes the company will be un-
able to buy the shares of a raider due to the
lack of readily available funds or for some
other reasons, e.g. the shares of the attack-
er are consolidated in the hands of share-
holders friendly to the attacker. In this case
the company or the persons affiliated with
the company may start to acquire other
tools of influence on the attacker or the
business group it belongs to, e.g. rights of
claim, debts, bills of exchange.
Propaganda
The company is well advised to make
use of media to let the public know its
arguments against a takeover. The com-
pany may strengthen its positive image
and emphasize its importance for the
region/country and, at the same time,
to put stress on the means of takeover
tactics used by the raider that fall within
the “grey” area of law or contradict the
law altogether. A skilfully organized PR
campaign may significantly influence the
position of state bodies, shareholders and
general public in favour of the company.
White Knight
A White Knight is a company (the
“good guy”) that gallops to rescue the
company that is facing a hostile takeover
from another company (a “Black Knight”)
by making a friendly offer to purchase the
shares of the target company. The target
may seek out a white knight by itself or
with the help of investment bankers.
People Pill
Here, management threatens that in
the event of a hostile takeover, the man-
agement team and the core specialists will
resign at the same time en masse. This is
especially useful if they are highly quali-
fied employees who are crucial in identi-
fying and developing business opportuni-
ties of the company. Losing them could
seriously harm the company, especially if
the company operates in hi-tech business
where talented human resources are the
main asset of the company. On the other
hand, hostile takeovers often result in the
management being fired anyway, so the
effectiveness of a people pill defence de-
pends on the specific situation.
III. Concluding remarks
Hostile takeover defence is an art, not
a science. Careful advance preparation is
necessary to ward off the unfriendly bids,
as being prepared can well make the dif-
ference between success and failure.
It is also important to remain flexible
in responding to changing dynamics of
takeover techniques. A company must
have an efficient defence strategy in place
to provide maximum flexibility in deal-
ing with whatever the attacking company
might throw its way.
There is no “one size fits all” strategy
to make the company takeover-proof.
Therefore, a regular review of the takeo-
ver environment is essential as is keeping
the available defences up to date.
in re | takeover defence
It is important to remain
flexible in responding to
changing dynamics of
takeover techniques.