Which defence against a hostile takeover is most likely to be upheld in US courts?
Recent decisions in three cases, Household, Revlon and SCM/Hanson Trust, will alter the way in which hostile take are defended in the US. The three cases focused on two takeover defences, the poison pill and the lock-up, and whether directors have the power to adopt them for their companies under what is known as the business judgement rule.
The poison pill is a right which a company distributes to its shareholders as a dividend, to buy preferred shares. The terms on which they may do so are extremely unattractive. However, the pill's attraction lies in its socalled flip-over feature. This allows the pillholder, on a takeover, to buy shares in the surviving - that is, acquiring - company at a discount to market price. That cost to the acquirer is designed to be prohibitively expensive, and so put off an unwanted bidder. The use of the poison pill was upheld in November in the Household case.
A lock-up is an option granted to a friendly third party, to sell him pan of the target company's business and so make the company less attractive to the bidder.