Corporate takeover defence pre-emptive actions “golden parachute”

golden parachuteHaving spent the last two articles describing how managers can take advantage of acquisition transactions to bolster their personal incomes at the expense of public investors, we can now start to take a look at how it is that companies will include a variety of corporate governance mechanisms to protect themselves from predatory acquisitions. While the reasoning for taking on such protective measures can vary, (such as the desire to maintain the independence of the company, or to keep control over the growth of the company over time), the end results are always the same, in that they strategically drip out both the control and the wealth of the company to shareholders.

A particularly common policy that companies will use to protect themselves from a take-over scenario is known as the ‘golden parachute’ clause, or an options vesting clause. Under this sort of policy, corporate managers are paid out an extremely large severance bonus in the event of an acquisition that leaves them without employment. While this strategy might seem comically self-centered at first, it is an extremely effective deterrent against hostile take-overs that might want to get rid of management and strip the company bare. Since the payment of the golden parachute leaves the company without much for capital after the acquisition, the acquiring company must effectively pay a greater price for the purchase, which makes the transaction much less appealing as a target.

Alternatively, companies have also setup similar clauses for employees which allow them to vest in their stock options early, which would effectively dilute out the price of a company’s equity, while increasing the volume of shares in circulation because of the way in which the employees are taking advantage of discounted options prices from their employer. The end result is that the acquiring company must now effectively pay out a premium to all of the employees of the company in order to make the purchasing transaction, which works out as a smaller ‘golden parachute’ for everyone involved. Again, this premium is often enough to negate the economic benefits of an acquisition.

An alternative protective clause that a company might have in place to prevent a hostile take-over bid from going through is to stagger the election terms of its board of directors, so that they don’t all line up at once. While this might seem counter-intuitive, it can prove to be an extremely effective deterrent in the way that it would draw out an unsolicited proxy-takeover situation to require years of time to complete. This is because of the way in which an acquiring company will often result of electing in its own supported board of directors to approve its take-over objectives when the existing board does not support the take-over. While this strategy is easier to accomplish than an overall shareholder vote, it does require that the acquirer control a majority share of the board of directors. In the event that they can only take over 1/10 seats per year, the company might instead simply choose to find another target to purchase.

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