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Subject 14. Takeover Defenses

Shareowners should carefully evaluate the structure of an existing or proposed takeover defense and analyze how it could affect the value of shares in a normal market environment and in the event of a takeover bid.

The consequences of mergers and takeovers may include redistribution of income, closing of some plants and expansion of others, and elimination of specific managerial and other positions and creation of others. Various anti-takeover defenses (e.g., golden parachutes, poison pills, and greenmail) tend to favor the interests of managers over those of Shareowners. They often interfere with the ownership rights of Shareowners and constitute an obstacle to efficient reallocation of resources.

The justification for the use of various anti-takeover defenses should rest on the support of the majority of Shareowners and on the demonstration that preservation of the integrity of the company is in the long-term interests of Shareowners. However, it is also hard to establish whether these defensive actions cause financial prejudice to Shareowners.

Investors should consider the following factors when reviewing a Company's anti-takeover measures:

  • Inquire whether the Company is required to receive Shareowner approval for such measures prior to implementation.
  • Inquire whether the Company has received any formal acquisition overtures during the past two years.
  • Is there a possibility that the Board or management will use the Company's cash and available credit lines to pay a hostile bidder to forego a takeover? (In general this is not good for Shareowners.)
  • Inquire whether the local or national government will interfere with the sale and force so the seller to change the terms of the proposed merger or acquisition.
  • Consider whether change-in-control provisions will trigger large severance packages and other payments to Company executives.

Practice Question 1

Which of the following is least likely classified as a takeover defense?

A. Greenmail
B. Cumulative voting
C. Golden parachutes

Correct Answer: B

The ability to use cumulative voting enables shareowners to vote in a manner that enhances the likelihood that their interests are represented on the board. It is a valuable shareowner right.

Study notes from a previous year's CFA exam:

14. Takeover Defenses