Protecting your company from a takeover is one of the most main priorities when it comes to running a business. In reality, most shareholders and other competitors are looking towards a takeover or antitakeover to hold a majority stock share in a company. This is especially true for most giant companies.
As a CEO and a company owner, it is one of your duties to prevent this from happening, amongst many other duties a CEO needs to fulfill. Thankfully, there are certain preventative measures you can take to avoid takeovers.
In this article, we will discuss the two main types of preventative anti-takeover measures, and how you can implement them. Learning about these is crucial as it equips you with the knowledge on how to protect your company better.
Think of it this way, your company is a precious castle, and there will always be people who will try to take over. In order to protect your castle, you need big, gigantic walls to prevent intruders from barging in and taking over.
In simpler terms, learning and exercising these said preventative measures is basically a wall building task. The higher and more resistant walls you build, the better. You are not just protecting your company from hostile takeovers, you are also protecting it from the raiders and their investment banking, and legal advisors.
Keep in mind that your enemies’ main goal is to devote their energies to designing different ways and strategies of scaling the defenses you have put in place. Your defenses are sometimes referred to as shark repellents, and for good reason. You need to make sure that the walls you build around your company constantly improves and gets better.
Now, onto the most common preventative measures to prevent hostile takeovers. The first preventative measure is often referred to as the “Poison Pills.”
The poison pills are basically securities issued by a potential target which makes the firm less valuable in the eyes of a hostile bidder. If it looks like the company is less valuable, it deflects the bidder’s attention elsewhere, or they might think the firm is of no value to them.
Poison pills can be an effective defense that has to be taken seriously by any hostile bidder. In fact, there are times when this type of preventative measures are so effective that the shareholder’s rights activists have pressured many companies to remove them. That is how effective this anti takeover measure is.
The strategy of Poison Pills was invented by the famous takeover lawyer Martin Lipton. Initially, Lipton used them in the year 1982 to defend the company El Paso Electric against General American Oil.
Lipton used the strategy again in 1983 during the Brown Foreman versus Lenox takeover contest. There are different types of poison pills, and they can be effective in dealing with raiders who seek to acquire a controlling influence in a target while no acquiring majority control.
The firms or companies that are protected by these Poison Pills ultimately may receive higher returns as a result of the pill defense.
Next in the list is an anti takeover measure aptly called the “Corporate Charter Amendments.”
The corporate charter amendments is not the same as corporation bylaws, there are differences between the two. For instance, the bylaws are usually established by the board of directors, and they set forth important rules for how the company will operate. On the other hand, a corporate charter is a more fundamental document that sets forth the company’s purpose and the different classes of shares it may have. This preventative measure is also often referred to as the articles of incorporation.
In these cases, a shareholder vote is usually required to change the articles of incorporation. There are many more major changes in how a company operates that may have to be set forth in the corporate charter and not by the bylaws.
From an M&A perspective, an action as big as staggering the board of directors needs to be in the corporate charter. To further implement this in the charter, it needs the shareholder’s approval. If it is not in the corporate charter prior to a hostile bid, there is a higher chance that the shareholders will not approve it.
Keep in mind that the changes in the corporate charter are common anti-takeover devices. The extent to which they may be implemented depends on state laws which can vary amongst different stays.
In this preventative measure, the target corporation can choose to enact various amendments in its corporate charter that will make it more difficult for any hostile acquirer to bring about a change in managerial control of the target. For instance, some of the amendments that can be done are supermajority provisions, staggered boards, fair price provisions, and dual capitalizations.
By using these methods, a hostile acquirer will find it very difficult to bring or make changes in the managerial control of your company. It is a bigger task that requires more time, energy, money and effort for a certain hostile acquirer which can make them think twice before a takeover.
Some of the more common antitakeover corporate charter changes are as follows:
◾ Staggered terms of the board of directors
◾ Supermajority provisions
◾ Fair price provisions
◾ Dual capitalizations
Keep exploring these common antitakeover corporate charter changes and see how you can implement them in your own company. You can choose to do only one of these, or do all of them. As long as you see it fit, and you know it will help protect your company for the better, then it must be done.
There you have it, the most common types of preventative anti-takeover measures. We hope that this article has helped you learn more about how you can protect your company better. Now, it’s time to study these methods and the legalities on how can further implement them.
These measures will help prevent any hostile takeovers and protect you and your shareholders’ assets. Remember, a strong leader needs to put up walls of defenses to keep his company safe. With these strategies in mind and in effect, you will be able to do that, too.