Back-End Plan

DEFINITION of 'Back-End Plan'

An anti-acquisition strategy in which the target company provides shareholders with the ability to exchange a shareholder rights dividend for cash or securities valued at a price determined by the company’s board of directors. A back-end plan, also known as a note purchase rights plan, is a type of poison pill defense.

BREAKING DOWN 'Back-End Plan'

Companies fending off a takeover bid may utilize several different techniques design to make the acquisition so costly and difficult that the acquiring company either gives up or is forced to negotiate with the company board rather than purchasing shares from existing shareholders. These anti-acquisition strategies are often referred to as “poison pills”, and include back-end plans.

A back-end plan is triggered when a company attempting a takeover bid acquires more than a specific percentage of shares. It is a type of put plan, as the shareholder has the right to exchange common stock for cash, debt securities, or preferred stock. By providing shareholders with the right to obtain shares with a higher value if the acquiring company reached a majority stake, the acquiring company would not be able to force a lower share price to complete the acquisition. If the acquiring company offers a price greater than the back-end price the poison pill will fail.

Back-end plans were developed in the 1980s as a defense against two-tiered bids, in which the acquiring company would pay a high price for shares until it held a majority of shares, and would then use the voting rights connected with those shares to force the remaining shareholders to accept a lower price in order to complete the merger.

Back-end plans typically involve providing shareholders with a dividend of preferred stock. If a company acquires a large block of shares – such as 20% - shareholders who held the preferred stock would be able to acquire super voting rights. The back-end price is usually set above the market price, but must be set at a price that is considered to have been made in good faith.