A shark repellent is any one of a number of strategies taken by public companies to repel an unwanted takeover or hostile bid from an acquirer. The objective is to fend off an unwanted suitor by making the target less attractive to the acquiring firm. The reduced potential gains from continuing with the transaction are intended to be sufficient to alter the strategic plans of the acquirer.
A target firm can make special amendments to its charter or bylaws that become active only when a hostile takeover attempt is announced. Alternatively, some of these actions may already be in place and just need to be enacted should the situation require it. This type of corporate defense tactic is sometimes referred to as a “porcupine provision”. As rules differ from one jurisdiction to the next, it is important traders familiarize themselves with the situation especially when attempting to make comparisons between different deals. For instance, the use of poison pills (Shareholder Rights Plan) are prohibited in the UK.
The major criticism of the use of shark repellents is that they benefit the firm’s management more than the stockholders. Management entrenchment is reinforced at the expense of the target firm’s financial position. Maria Goranova explores this issue further in her book Shareholder Empowerment: A New Era in Corporate Governance.
Shark Repellent Examples
Some of the more common shark repellents measures employed by the board of directors to thwart the acquirer’s attempts to gain control are as follows:
- Staggered Boards – The election of directors is staggered over a multi-year period. As only a small proportion of directors are elected at each annual meeting, this will lengthen the amount of time it would take a bidder to gain full control over the board.
- Supermajority Provision – The proposed action often requires obtaining two-thirds or three-fourths of the majority of votes rather than a simple majority. The hostile acquirer must purchase or obtain a proxy from a larger number of shareholders in order to proceed with the takeover. Such an action would often require the consent of a proxy advisory firm.
- Macaroni Defense – Issuing a large number of bonds with a provision that if the firm is taken over, they must be redeemed at an uneconomically high price.
- Golden Parachute – An employment contract provision with top executives that making it prohibitively expensive to remove existing management. This often involves stock options or a lump sum payment.
- Defensive Merger – A merger with another firm designed to cause potential anti-trust or other regulatory problems for completing the hostile takeover.
- Poison pills – We cover poison pills in greater depth in our standalone article “Hostile Takeovers and Merger Arbitrage – What All Traders Should Know“
As a recent example of an anti takeover strategy, Red Robin Gourmet Burgers (RRGB) enacted a poison pill defense to thwart the actions of activist investor Vintage Capital. Merger arbitrage spreads are almost always wider in these situations representing the lower deal closing probability (DCP) and greater risk to the merger arbitrageur. At time of writing, this is an ongoing battle which has involved additional shareholders condemning the action.
