Lobster Trap

AAA

DEFINITION of 'Lobster Trap'

A strategy used by a target firm to prevent a hostile takeover. A lobster trap anti-takeover strategy involves the target company passing a provision that prevents any shareholder, with an ownership stake of over 10%, from converting convertible securities into voting stock. This prevents large shareholders from adding to their voting stock position and facilitating the takeover of the target company. “Lobster Trap", yet another colorful entry in the lexicon of anti-takeover terminology, is derived from the fact that such traps are aimed at catching large lobsters but not small ones.

INVESTOPEDIA EXPLAINS 'Lobster Trap'

The convertible securities covered by the “lobster trap” provision include any securities that can be converted into voting stock – convertible bonds, convertible preferred shares, convertible debentures and warrants.
 
The lobster trap is just one tactic in an arsenal of defense mechanisms that a company can use to fend off an unwelcome suitor. It can be used either by itself or in conjunction with other tactics such as poison pill, white knight, scorched-earth, crown jewel, etc. to rebuff a hostile acquirer.
 
For example, an enterprise named Small Pond Co. may have received a hostile takeover offer from larger rival Big Fish Inc. Small Pond’s directors and management are extremely averse to the company being swallowed up by Big Fish, and are trying to drum up shareholder support  to reject the offer. They are aware of a large hedge fund that owns 15% of Small Pond’s voting shares, plus warrants that if converted would give it an additional 5% stake in the company. Fortunately, Small Pond’s founders had the foresight to include a “Lobster Trap” provision in their corporate charter to prevent the company from falling into undesirable hands. The company’s Board of Directors therefore uses the provision to prevent the hedge fund from converting its warrants into voting shares, and succeeds in rejecting the hostile bid.
 

RELATED TERMS
  1. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative ...
  2. Management Buyout - MBO

    A transaction where a company’s management team purchases the ...
  3. Sandbag

    A tactic used to hide or limit expectations of a company's or ...
  4. Hostile Takeover

    The acquisition of one company (called the target company) by ...
  5. Merger

    The combining of two or more companies, generally by offering ...
  6. Poison Pill

    A strategy used by corporations to discourage hostile takeovers. ...
RELATED FAQS
  1. If a company offers a buyback of its shares, how do I decide whether to accept the ...

    Tender offers for share buybacks are often made at a premium to the current market price; it may be in an investor’s best ... Read Full Answer >>
  2. How is a tender offer used by an individual, group or company seeking to purchase ...

    A tender offer is made directly to shareholders in a publicly traded company to gain enough shares to force a sale of the ... Read Full Answer >>
  3. Why would it be in the interest of shareholders to accept a tender offer?

    It would be in the best interests of shareholders to accept a tender offer if it is well above the current market price – ... Read Full Answer >>
  4. How does a company record profits using the equity method?

    A company that invests in another company and has majority control of it would record profits using the equity method. This ... Read Full Answer >>
  5. What usually happens to the price of a stock when a tender offer for shares of the ...

    Usually, the price of a stock rises when a tender offer for shares of the company is made public. A tender offer is an offer ... Read Full Answer >>
  6. How does horizontal integration allow companies to share resources?

    In a horizontal integration, a company either acquires another company or merges with that company. This allows the resulting ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Mergers And Acquisitions: Understanding Takeovers

    In the dramatic world of M&As, battleground terms meld with bizarre metaphors to form the language of the game.
  2. Home & Auto

    The Getty Oil Takeover Fiasco

    It was the largest takeover in history and one of the most dramatic. Learn all about the fate of Getty Oil.
  3. Fundamental Analysis

    Key Players In Mergers And Acquisitions

    Strategic acquisition is becoming a part of doing business. Discover the different types of investor groups involved.
  4. Forex Education

    Mergers & Acquisitions: An Avenue For Profitable Trades

    When major corporate transactions have a big impact on the currency markets, you can benefit.
  5. Investing

    A Guide To Spotting A Reverse Merger

    This corporate action can be profitable for investors who know what to look for.
  6. Mutual Funds & ETFs

    Corporate Takeover Defense: A Shareholder's Perspective

    Find out the strategies corporations use to protect themselves from unwanted acquisitions.
  7. Active Trading Fundamentals

    Trade Takeover Stocks With Merger Arbitrage

    This high-risk strategy attempts to profit from price discrepancies that arise during acquisitions.
  8. Options & Futures

    Pinpoint Takeovers First

    Use these seven steps to discover a takeover before the rest of the market catches on.
  9. Bonds & Fixed Income

    Trademarks Of A Takeover Target

    These tips can lead you to little companies with big prospects.
  10. Investing

    Mergers Put Money In Shareholders' Pockets

    Learn the five ways mergers and acquisitions can increase a company's value.

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!