Shark Repellent

What Does Shark Repellent Mean?

Shark repellent is a shoptalk term for measures taken by a company to fight off an undesirable or hostile takeover endeavor. By and large, a company will make special amendments to its charter or local laws that become active just when a takeover endeavor is announced or introduced to shareholders. These standing rules are meant to make the takeover less attractive or productive to the greedy firm. They are otherwise called a "porcupine provision."

Shark Repellent Explained

Most companies need to determine their own destiny in the marketplace. So when a shark attacks, shark repellent actions can ship off the predator to look for a less fiery target. While the concept appears to be reasonable in light of the principle of self-determination, many shark repellent measures are not to the greatest advantage of shareholders on the grounds that the measures could deny shareholders the potential for maximum shareholder value gains. Hence, shark repellents possess a moral gray area in management theory.

Shark repellents can be utilized to invalidate takeover endeavors that are not "pre-endorsed" by the management team of the target firm. For instance, they could bring about executive team cutbacks. In any case, they might bring about a bump in share prices or the getting firm might offer a premium to existing shareholders for their shares.

It is widely held that board directors have a fiduciary responsibility to shareholders and consequently ought to be available to any offered — hostile or not. Splashing shark repellent isn't generally viewed as a shareholder-accommodating action by the board.

Shark Repellent Tactics

Tactics used to repulse sharks contrast in view of the attack employed by the predator. A portion of the more famous shark repellent tactics are framed below:

Golden parachute: In a golden parachute, a company incorporates a large payout to a senior executive's contract to make the takeover more costly for the securing company. It is fundamentally used to safeguard senior management, who might get downsized during a takeover.

Poison pill: A poison pill is otherwise called a shareholder rights plan. It gives the existing shareholders the right to purchase extra shares at a discounted rate. The thought is to reduce the hostile bidder's holdings by permitting different shareholders to load up on the company's stock.

Staggered tenures: As the name demonstrates, a stunned tenure tactic includes faltering or partitioning the tenure for a board of directors to reduce their influence in critical navigation. For instance, companies can have a rolling tenure of two years or so for their board of directors. In the event that a takeover offer is made during this time span, deferring a vote regarding this situation can assist companies with keeping away from the offer.

Macaroni defense: A macaroni defense embeds a provision for the sale of a large number of bonds in the event of a takeover. The new bonds add to the overall costs that the obtaining company must pay notwithstanding the takeover price.

Different instances of shark repellents are scorched earth policies and safe harbor strategies.

Shark Repellent Example

On Aug. 28, 2017, shoe retailer Finish Line announced its board of directors had adopted a shareholder rights plan (poison pill) "to safeguard the best interests of Finish Line shareholders. The [plan] is intended to reduce the likelihood that any person or group would gain control of Finish Line through open market accumulation or coercive takeover tactics that the Board of Directors determines are not to the greatest advantage of the Company and its shareholders." Details of this shark repellent were uncovered in a Form 8-K filing by the company.

The day after the announcement of the adoption of the poison pill plan, the company's stock plunged as much as 34% from the previous closing price and ended the day down around 18%. With no other negative news impacting the company that day, it is safe to expect that shareholders were repulsed themselves by the shareholder rights plan.

Features

• Shark repellent tactics allude to measures taken by a company to fight off undesirable or hostile takeover endeavors.
• Shark repellents possess a moral gray area on the grounds that a company's management may not necessarily act to the greatest advantage of shareholders in acquisitions that benefit the last option and not the former.
• Instances of shark repellents are golden parachute, macaroni defense, and poison pill.