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How can corporate boards keep control when threatened with a takeover?

On Behalf of | May 2, 2022 | Corporate Litigation

Elon Musk’s attempt to takeover Twitter provides a valuable opportunity to discuss what options are available to corporate boards in similar situations. What happens when an outside party, or even a fellow board member, attempts to takeover the company?

There are various maneuvers the board can take to slow down or even stop the potential takeover. This piece will discuss the basics of three common approaches.

Option #1: Poison pill

The corporate board at Twitter adopted this option, also known as a shareholder rights plan. A poison pill is a financial strategy that can take on many different forms. In one, it essentially floods the market with the company’s stock. This thwarts the takeover by making it too costly. In this example, Twitter’s board considered an agreement that would trigger the poison pill if any single shareholder held 15% or more of the company’s stock. Instead of flooding the market, their version of the poison pill, when triggered, would allow current shareholders to purchase additional shares at a discount. This would make it more difficult for any one shareholder to have the majority of votes to move forward a proposed acquisition.

There are some hurdles with this option, such as potential litigation. Shareholders could counter this move by board members and argue that the board of directors is not acting in their best interest. For this argument, the shareholders would need to establish that the board was focused on their own interests. This can prove successful because if the takeover were to move forward, the board will likely lose their jobs.

The board may use this option to help move negotiations forward. In the Twitter example, the board was clear to state it was not against negotiations and would consider an acquisition proposal as long as it was in the company’s best interest.

Option #2: Board composition

The company can proactively reduce the risk of a takeover by having a staggered board of directors. This means the organization votes board members in at different periods and to serve set terms. As a result, the company would have staggered re-elections, making it difficult to vote out an entire board.

Option #3: Injunctive relief

If there is concern of wrongdoing to help move the deal forward, the board could request a court order to stop the action, known as an injunction. This could arise in a number of different scenarios, such as concerns the acquiring individual has violated the Williams Act, a federal law put in place by lawmakers to protect investors. This law essentially requires full disclosure from the individual or corporation making the offer to purchase.

These are just a few of the options available for those who are looking to avoid or better navigate negotiations for a potential takeover.