Takeover Defenses and Fiduciary Duties

Takeover Defenses Terminology

• Crown Jewel:
  • When a company is threatened with a takeover, management may try to make the company less attractive to the raider.
  • This is done by selling the company's most valuable asset (the "crown jewel") to a third party.
• Golden Parachute:
  • When a takeover is successful, top management is usually changed.
  • To prepare for this, a company may establish special termination or retirement benefits that must be paid to top managers if they are "retired."
  • A departing high-level manager's parachute will be "golden" when they are forced to "bail out" of the company.
• Greenmail:
  • To regain control, a target company may pay a higher-than-market price to repurchase all of the stock that the acquiring corporation bought.
  • When a takeover is attempted through a gradual accumulation of target stock rather than a tender offer, the intent may be to induce the target company to buy back the shares at a premium price.
  • This concept is similar to blackmail.
• Pac-Man:
  • Named after the Atari video game.
  • This is an aggressive defense in which the target corporation attempts its own takeover of the acquiring corporation.
• Poison Pill:
  • The target corporation issues to its stockholders rights to purchase additional shares at low prices when there is a takeover attempt.
  • This makes the takeover undesirably or even prohibitively expensive for the acquiring corporation.
• White Knight:
  • The target corporation solicits a merger with a third party.
  • The third party then makes a better (often simply a higher) tender offer to the target's shareholders.
  • The third party that "rescues" the target is the "white knight."

Fiduciary Duties and Entrenched Management

• The board of directors has a fiduciary duty to the corporation and its shareholders to act in the best interests of the company.
• In a hostile takeover attempt, directors’ duties of loyalty may collide with self-interest (i.e., the desire to keep their jobs).

Heightened Standards of Review

• Courts have articulated different heightened standards of review in specific change-of-control scenarios.
  • Unocal Review:
    • Courts apply the Unocal Test to analyze defensive measures taken by directors in response to a hostile takeover.
  • Revlon Review:
    • Courts apply the Revlon Test when the sale of a company is inevitable.

Asset Stripping

• Asset-Stripping:
  • The process of buying an undervalued company with the intent of selling off its assets to generate profit for shareholders.
  • While proceeds from asset stripping may be used to pay down debt, proceeds are often used to pay a dividend to shareholders.

Impact on Other Corporate Stakeholders

• Creditors:
  • Asset stripping weakens the company, which has less collateral for borrowing.
  • The company may have its value-producing assets stripped out, leaving it less able to support debt on the books.
• Employees:
  • Asset stripping can result in a significant loss of jobs, especially if the sale of assets involves moving subsidiaries to new locations.

Fiduciary Duty: To Whom?

• Does harm to creditors, employers, or other corporate stakeholders matter?
• Should a corporation not take actions that harm other corporate stakeholders unless the benefit to shareholders exceeds such harm?
• Do we need to redefine fiduciary duties more broadly to include other corporate stakeholders?
• Or should we put the onus on the legislature to enact laws to protect these stakeholders against business entities that ruthlessly act to maximize shareholder value?