‘Shark repellent’ is a popular expression for steps by a target company to fend off a hostile takeover bid of the raider. In many cases, when a takeover attempt is announced the target company activates special amendments to its charter or bylaws, so far not made effective. The design is to make takeover of the particular target a less attractive proposition to the acquiring company.
Instances of ‘shark repellent’ steps are given below.
Supermajority provisions may be incorporated in the bylaws of a target company, requiring a special majority of, say, two thirds or three fourths instead a simple majority of just more than 50% of the shareholder votes to ratify a takeover by an outsider.
Stipulation for staggered board of directors in the charter of the target company mandates that only a proportion of the board members, say one third, are liable to be removed or replaced every year. So, a raider despite holding majority stock in the target company would never be able wrest control of its board outright at one go.
Fair price provisions in the bylaws of the target company require the buying company to pay the minority or dissenting shareholders of the target fair price for their stocks. Such clauses also require the bidder to offer the same price to all shareholders of the target company. This makes the proposed takeover a far more difficult proposition.
‘Golden Parachute’ contracts with members of senior managerial cadre of the target guarantees for these senior executives lavish termination benefits for job loss following take over of the company by the predator. With ‘Golden Parachute’ contracts in place, it is prohibitively expensive for the bidder to dislodge the incumbent management.
Just before take over bid the shareholders of the target are issued stocks with disproportionate or higher voting rights to check mate such hostile attempts. This raises the stock swap or exchange ratio against the raider in corporate hostile takeovers.
Nevertheless, shark repellent measures, even as hostile takeover defense options, need not necessarily be in the best interests of the shareholders of the target company since some of these may burden the company with extra liabilities.
Those shark repellent or defense options, that also saddle the target company with additional liability, are collectively known as poison pill.
Shark repellent is also used as a stock market term for poison pill.
