Is Your Company Shark-Proof?

Marty Lipton, others, offer what's new in takeover defenses.

In the James Bond film “Tomorrow Never Dies,” an undercover 007 posing as a banker quips early on that he specializes in “hostile takeovers.”

It’s not lost on the audience who know that he’s about to begin an explosive escapade to destroy a corrupt corporate executive’s plan.

While few companies on this side of the silver screen have international spies to worry about, hostile takeovers can be a very real threat. And having appropriate takeover defenses is a definite need considering there is no warning. But don’t take Mr. Bond’s word for it.

Last year, the U.S. domestic market saw 32 announced hostile takeovers worth $39 billion, according to Thompson Financial Securities Data. In 1999, $100 billion in hostile mergers were announced.

And with many stock prices way down from their highs, there is strong likelihood that 2001 will be a busy year for M&A, and many of the deals don’t figure to be of a friendly nature.

This means corporate execs who want their companies to remain independent must re- evaluate their takeover defenses to make sure they are up-to-date and shark-proof.

Sure, the financially motivated, bust-up corporate raider bids of the 1980s are over. Today’s takeover attempts are typically more strategically motivated, whereby an interloper tries to breakup proposed mergers as in Pfizer’s bid for Warner-Lambert or GE’s bid for Honeywell.

Or very simply, the raiding company happens to be in the same industry as the target-company.

Interestingly though, takeover defenses are little changed from the 1980s, when many of these tactics were first adopted.

Poison pills, also known as shareholders rights plans, basically entail the creation of a special class of stock designed specifically to discourage or ward off hostile takeovers by making the ultimate price tag much higher. A popular form of the pill enables existing shareholders to buy more stock for, say, half the current market price.

These pills are typically triggered after the unwanted suitor buys up a pre-determined percentage of the target’s outstanding shares.

“We strongly advise companies to continue to have a pill,” says Martin Lipton, the corporate lawyer credited with inventing the poison pill defense nearly 20 years ago. This is critical since very few companies fail to renew the pill after it expires, notes Lipton, a partner at Wachtell, Lipton, Rosen & Katz in New York City.

However, the best takeover defense is to combine a poison pill with a staggered board of directors, says Lipton and other takeover defense experts.

And experts say a staggered board of directors is a good way to keep a poison pill in place, as it allows for only a portion of the corporate board of directors to be elected each year. This prevents hostile acquirers from successfully staging a proxy fight because they won’t be able to gain a majority on the board of directors in one year.

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