Explains all the elements of takeover defense including concepts, plans, strategies, examples and cases.

1. HOSTILE TAKE OVER
DEFENSIVE STRATEGIES
Dr Indukoori S S N Raju

2. I. Equity Strategies
A. Poison Pills
B. Buy Back
C. Tender offer
II. Debt Strategies
A. Poison Puts
B. Other Debt Strategies
III. People Strategies
A. People Pill
B. Parachutes
IV. Aggressive Strategies
A. Pac Man Defense
B. Crown Jewel
C. White Knight
D. Litigation
V. Agreements and Amendments
A. Stand Still Agreement
B. Shark Repellents
CONTENT
2D R I N D U K O O R I S S N R A J U

3. Target companies monitor known and unknown raiders’ moves
through early warning systems including monitoring
shareholding pattern and trading pattern in the open market.
Broadly takeovers, buybacks and related strategies fall under the
ambit of the following.
• The companies act
• SEBI Takeover code
• SEBI Buyback Regulations
• RBI in case of Banking Companies
D R I N D U K O O R I S S N R A J U 3
DEFENSIVE STRATEGIES

4. Based on the nature of the raider and its problem, target
companies formulate customized strategies as follows.
I Equity Strategies
II Debt Strategies
III Aggressive Strategies
IV Employee Strategies
V Agreements and amendments
4
D R I N D U K O O R I S S N R A J U
CLASSIFICATION OF DEFENSIVE STRATEGIES

5. I
EQUITY STRATEGIES

6. A. Poison Pills
B. Buy Back
C. Tender offer
D R I N D U K O O R I S S N R A J U 6
I. EQUITY STRATEGIES

7. Issue of preferred stock or convertible securities to the
disadvantage of the acquiring company. It initiated by Martin
Lipton, an American lawyer and advisor on mergers.
• First used by Martin Lipton to defend El Paso Electric against
General American Oil in 1982.
• Again in 1983 by Martin Lipton to defend Lenox against
Brown Foreman in 1983.
• Gillette was a popular case study using poison pills
successfully against 4 hostile takeovers in late 1980s.
D R I N D U K O O R I S S N R A J U 7
A. POISON PILLS

8. 1. Flip Over Pill
2. Flip In Pill
3. Back End Plans / Note Purchase Rights Plans
4. Net Operating Loss (NOL) Pill
5. Voting Pill
6. Chewable Pill
7. Shadow Pill / Hidden Pill
D R I N D U K O O R I S S N R A J U 8
TYPES OF POISON PILLS

9. • It is a strategy that allows target firm’s shareholders to buy
shares of the acquiring company at a discounted price in case
of a hostile takeover.
• It the rights issue of shares of the acquiring company at very
low price to the existing share holders of the target company.
• This happens only when a takeover open bid arises.
D R I N D U K O O R I S S N R A J U 9
1. Flip Over Pill

10. • It is a strategy a target company may use to make it difficult
for the acquirer to gain control of the company. It is a
provision in the takeover candidate's bylaws that
• It gives existing shareholders of the targeted company,
excluding the acquirer, the rights to purchase additional shares
of the targeted company at a discounted price.
• This defence tactic dilutes the share price of the targeted
company and the percentage of ownership the acquirer may
already have.
• Results in 100% dilution of shares of the Target firm.
D R I N D U K O O R I S S N R A J U 10
2. Flip In Pill

11. • It is also known as Note Purchase Rights Plan.
• The first back end plan was developed in 1984.
• Share holders receive a rights dividend, which gives
shareholders the ability to exchange this rightS along with a
share of stock for cash or senior securities that are equal in
value.
• Back-end’ price stipulated by the issuer’s board of directors.
• These rights may be exercised after the acquirer purchases
shares in excess of a specific percentage of the target’s
outstanding shares.
D R I N D U K O O R I S S N R A J U 11
3. Back End Plans

12. • This is related to takeover of a target company which has
accumulated losses to gain the tax advantage.
• This strategy stops the corporate raider to take the advantage
of NOL.
• The board links the NOL benefit to percentage of hostile
bidder every year.
D R I N D U K O O R I S S N R A J U 12
4. Net Operating Loss (NOL) Pill

13. • First developed in 1985 to prevent any outside entity from
obtaining voting control of the company.
• Target company issues preferred shares without voting rights.
• These shareholders get voting rights only after takeover.
• Post takeover increase in voting rights suffocates the acquiring
company.
• This makes the raider to call back.
D R I N D U K O O R I S S N R A J U 13
5. Voting Plans

14. • This is conditional strategy where the target firms agree for the
hostile takeover.
• Higher price to be paid is the condition.
• If additional price is paid for the hostile takeover the pills
disappear. If not poison pills get triggered
D R I N D U K O O R I S S N R A J U 14
6. Chewable Pills

15. • It is any pill issued by the target firm to its share holders.
• Implemented just before the day of takeover.
• It is not known to the bidder till the takeover happens.
D R I N D U K O O R I S S N R A J U 15
7. Shadow Pill / Hidden Pill

16. • Target firm purchases its own stock from others.
• It is also known as stock repurchase.
• It can be classified as follows
1. Buy Back From public
2. Buy back from green mailer
D R I N D U K O O R I S S N R A J U 16
B. Buy Back

17. • Target company buys back from public through the market
with an open tender offer.
• This is done to accumulate the shares on the company’s name
with less float in the market discouraging the hostile takeover.
• Mind Tree planned to buyback shares from the public to stop
L&T’s hostile takeover.
• Buybacks come under the regulation of
• The companies act : Section 77A
• SEBI Takeover code
• SEBI Buyback Regulations
D R I N D U K O O R I S S N R A J U 17
2. Buy back from Public

18. 18D R I N D U K O O R I S S N R A J U
Popular Buy Backs in 2017

19. CASH RICH BUYBACKS
19D R I N D U K O O R I S S N R A J U

20. • It is a buyout by the target firm’s own shares from the hostile
acquirer with a premium over the market price,
• This results in the acquirer’s agreement not to pursue obtaining
control of the target in the near future.
• The taxation of greenmail used to present a considerable
obstacle for this defence.
• This strategy may require a shareholder approval of repurchase
of a certain amount of shares at a premium.
D R I N D U K O O R I S S N R A J U 20
2. Buy back from Green Mailer

21. It is the price offer by the target company to its own share
holders. It can be classified as
1. Open Tender offer
2. Self Tender / Scorched Earth
D R I N D U K O O R I S S N R A J U 21
C. TENDER OFFER

22. • It is the price offer by the target company to the public who are holding
the shares of the target company.
• The offer price is more than the market price.
• This strategy is to stop the hostile takeover.
• It discourages the green mailer or corporate raider as offer of the raider
should be more than the open tender of the target company.
• Some companies adopt this strategy to prevent any kind of hostile take
over in future.
• Ex: Vedanta Resources made a open tender to the share holders of
Vedanta Ltd.
D R I N D U K O O R I S S N R A J U 22
1. Open Tender

23. • It is also known as Scorched Earth.
• It is a self-tender offer by the target.
• The target company tenders to itself with an offer price to a
specific group of share holders but not to the public.
• This is the process to stop the hostile take over.
• This plan burdens the target with debt.
D R I N D U K O O R I S S N R A J U 23
2. Self Tender

24. II
DEBT STRATEGIES

25. II. DEBT STRATEGIES
D R I N D U K O O R I S S N R A J U 25
Target firm uses debt channel to stop the raiders. They are as follows.
1. Poison Puts: Issue debt instrument with put option which allows the
holders to sell or redeem the holdings at certain time period and for a
specific price. This demands huge cash after takeover making the deal
unattractive.
2. Bank Mail : Agreement with bank not to fund hostile firm.
3. Leveraged recapitalization : Aggressive borrowing with high debt-
equity ratio.
4. Lobster Trap: Target issues a charter preventing individuals holding
more than 10% of convertibles cannot convert their securities into voting
stock.

26. IV.
PEOPLE STRATEGIES

27. 1) People Pill : Mass layoff or resignations in case of takeover.
2) Parachutes / Golden Shake Hand : High employee Pay if
terminated after takeover
• Golden Parachute : Top level
• Silver Parachute: Middle level
• Tin Parachute: Low level
3) Employee Stock Ownership Plan (ESOP): It is also known
as employee stock Option. Companies issue ESOPs to make the
raider worried about the shares in the hands of employees.
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D R I N D U K O O R I S S N R A J U
A. PEOPLE STRATEGIES

28. III
AGGRESSIVE STRATEGIES

29. AGGRESSIVE STRATEGIES
D R I N D U K O O R I S S N R A J U 29
A. Pac Man Defense
B. Crown Jewel
C. White Knight
E. Litigation

30. D R I N D U K O O R I S S N R A J U 30
• Counter bid by target firm to acquire raider.
• Target firm offers a price above the market price to the
shareholders of the corporate raider.
• This makes the raider step back and think about the hostile
takeover.
A. PACMAN DEFENCE

31. D R I N D U K O O R I S S N R A J U 31
• It refers to a valuable subsidiary or division or asset of target
company.
• Target firm secures its crown jewel by insulating it from the
corporate raider through a spin off to a friendly firm.
• Spin off is the process of converting the existing subsidiary or
a division into a new company.
• Though takeover is complete, Raider is denied access to jewel.
• Ex: India cements ltd failed to meet its objectives of Raasi
Cements takeover as Vishnu Cements (motive for takeover)
was sold to major investors after Takeover
B. CROWN JEWEL

32. D R I N D U K O O R I S S N R A J U 32
• White Knight is a friendly investor who acquires a target
company’s stake to combat hostile take over by a black
knight.
• Usually, target firm invites other firms to bid for its
shares so that offer price becomes lucrative.
• This happens while the target firm is facing a hostile
takeover or it is facing bankruptcy.
• This creates competition dissolving the idea of hostile
takeover.
C. WHITE KNIGHT

33. D R I N D U K O O R I S S N R A J U 33
• Yellow Knight : It is a company that planned
a hostile takeover, but backs out of and proposes a merger of
equals with the target company.
• Grey Knight: The grey knight outbids the white
knight. Although friendlier than a black knight, the gray
knight still seeks to serve its own interests.
• White Squire: Similar to the white knight, but exercises a
minority stake to aide a struggling company. This aide
provides the company with enough capital to improve its
situation while allowing the current owners to maintain
control.
Other related

34. D R I N D U K O O R I S S N R A J U 34
This makes target firm unattractive due to the legal
complications.
• Revoke old litigation/s
• Snow ball existing litigation/s.
• Create new litigation/s
D. LITIGATION

35. V.
AGREEMENTS & AMENDMENTS

36. These are the strategies associated with agreeemnet
with the coroporate raiders or amendments in
corporate charter to stop the hostile takeover. Broadly
they can be classified as follows.
• A. Standstill Agreement
• B. Shark Repellants
D R I N D U K O O R I S S N R A J U 36
V. AGREEMENTS & AMENDMENTS

37. • It is the agreement between the target company and a potential hostile
takeover company to pause the acquisition process and not to increase the
stake further.
• It happens more with green mailer to stop his acquisition and avoid target
company’s control transfer.
D R I N D U K O O R I S S N R A J U 37
A. STAND STILL AGREEMENT

38. Amendment in articles of association or Corporate charter Amendment.
1. Rights of share holders redefined in case of acquisition.
2. Staggered terms of board of directors
A. Minimizing the number of directors in a year.
B. Classified directors cannot be removed before term expiry.
C. Mandatory shareholders approval for changes in BOD
3. Super majority provisions: Raising the minimum percentage of votes
required from 51% to 90%.
4. Fair price provisions to minority share holders.
5. Dual capitalizations: Restructuring of equity into 2 classes of stock with
different voting rights (Ford, Berkshire Hathaway).
6. Golden Shares: Minimum holding of promoters to rise upto 51%
D R I N D U K O O R I S S N R A J U
38
B. SHARK REPELLANTS

39. D R I N D U K O O R I S S N R A J U 39
1. Patrick A Gaughan, Mergers, Acquisitions and Corporate
Restructuring, 4th Edition, John Wiley.
2. Rita Ricardo – Campbell, Resisting Hostile Takeovers – The
case of Gillette.
3. David Sirota, Hostile Takeover – How big money and
corruption conqured our government and how we take it
back.
References

40. Any Questions….
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41. Thank You
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