Back-End Plan

What Is a Back-End Plan?

A back-end plan is an enemy of acquisition strategy wherein the target company furnishes existing shareholders — with the exception of the company endeavoring the takeover — with the ability to exchange existing securities for cash or different securities valued at not entirely settled by the company's board of directors.

A back-end plan, otherwise called a note purchase rights plan, is a type of poison pill defense. Poison pill defenses are utilized by companies to forestall a hostile takeover by an outside company. The key characteristic of a hostile takeover is that the target company's management doesn't believe the deal should go through.

How a Back-End Plan Works

Back-end plans were developed during the 1980s as a defense against two-layered takeover bids. In a two-layered takeover bid, the getting company would pay a high price for shares until it held a majority of shares. The company would then utilize the voting rights associated with those shares to force the excess shareholders to acknowledge a lower price to complete the merger.

Companies fending off a takeover bid may use several unique procedures intended to make the acquisition so expensive and troublesome that the gaining company either surrenders — or is forced to haggle with the company board instead of purchasing shares from existing shareholders. These enemy of acquisition strategies are frequently alluded to as poison pills, and incorporate back-end plans.

A back-end plan is put into movement when a company endeavoring a takeover bid gets in excess of a specific percentage of outstanding shares of a takeover target. It is a type of put plan, as shareholders reserve the option to exchange common stock for cash, debt securities, or preferred stock — preferred stock is the most normal security issued regarding a back-end plan. In the event that an outside company gets a large block of shares —, for example, 20% — shareholders who hold the preferred stock would have the option to secure super voting rights.

The back-end price is normally set above the market price, however must be set at a price that is considered to have been made sincerely. By giving shareholders the right to get shares with a higher value on the off chance that the gaining company arrived at a majority stake, the procuring company wouldn't have the option to force a lower share price to complete the acquisition. On the off chance that the gaining company offers a price greater than the price determined in the back-end plan, the poison pill will fail.

Highlights

• Poison pill defenses are utilized by companies to forestall a hostile takeover by an outside company.
• A back-end plan is an enemy of acquisition strategy where the target company furnishes existing shareholders — with the exception of the company endeavoring the takeover — with the ability to exchange existing securities for cash or different securities valued at not entirely settled by the company's board of directors.
• A back-end plan, otherwise called a note purchase rights plan, is a type of poison pill defense.