Lobster Trap

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.

BREAKING DOWN '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. Convertible Security

    An investment that can be changed into another form. The most ...
  2. Convertible Arbitrage

    A trading strategy that typically involves taking a long strategy ...
  3. Voting Poison Pill Plan

    An anti-takeover strategy in which the company being targeted ...
  4. Convertibles

    Securities, usually bonds or preferred shares, that can be converted ...
  5. Convertible Hedge

    A trading strategy that consists of a long position in a company's ...
  6. Dead Hand Provision

    A stipulation on a defense mechanism (or poison pill) used by ...
Related Articles
  1. Options & Futures

    20 Investments: Convertible Security

    What Is It? A convertible, sometimes called a CV, is either a convertible bond or a preferred stock convertible. A convertible bond is a bond that can be converted into the company's common stock. ...
  2. Financial Advisors

    Worried About Stocks? Try on Convertibles

    Convertibles are a good hedge against equity market risk (if you're o.k. with losing a bit of upside potential).
  3. Investing Basics

    Warding Off Hostile Takeovers

    The purpose of this article is to provide a general overview of hostile corporate takeovers, while highlighting a general course of action against such activity. This article provides basic information ...
  4. Bonds & Fixed Income

    Convertible Bonds: Pros And Cons For Companies And Investors

    Find out why businesses choose this type of financing and what effect this has on investors.
  5. Mutual Funds & ETFs

    3 Best High-Yielding Convertible Bond Mutual Funds (LACFX, FACVX)

    Discover an often overlooked asset class and how your portfolio can benefit from it, and learn about three of the highest-yielding options available.
  6. Options & Futures

    The Magic Of Convertible Securities

    The only real difference between you and Warren Buffett is a few well-chosen stocks – the billion-dollar fortune is the result.
  7. Bonds & Fixed Income

    Convertible Bonds: An Introduction

    Find out about the nuts and bolts, pros and cons of investing in bonds.
  8. Mutual Funds & ETFs

    3 Best High-Yielding Convertible Bond ETFs (CWB, ICVT)

    Discover how convertible bond ETFs can offer investors growth and income while hedging fixed income portfolios in a rising rate environment.
  9. Bonds & Fixed Income

    The Top 6 Convertible Bond Funds for 2016

    Take a look at convertible bond mutual funds that are well-positioned heading into 2016, and why investors might consider a convertible fund portfolio.
  10. Bonds & Fixed Income

    Leverage Your Returns With A Convertible Hedge

    Find out how you can maintain your income stream by using this type of bond strategy.
RELATED FAQS
  1. Do convertible bonds have voting rights?

    Convertible bonds usually have no voting rights until they are converted. Even after conversion, they may not be granted ... Read Answer >>
  2. If a company offers a buyback of its shares, how do I decide whether to accept the ...

    Learn why it may often be in the best interest of a shareholder to accept a tender offer made at a premium to the market ... Read Answer >>
  3. How can a company resist a hostile takeover?

    Learn about some of the defense strategies a public company's board of directors might employ to prevent a hostile bidder ... Read Answer >>
  4. Under what circumstances might a company decide to do a hostile takeover?

    Learn about why companies use a hostile takeover to gain control of another company, and understand the different methods ... Read Answer >>
  5. Where does the stock come from when convertible bonds are converted to stock?

    First, let's define convertible bonds. A unique combination of debt and equity, they provide investors with the chance to ... Read Answer >>
  6. What is the difference between convertible and reverse convertible bonds?

    The difference between a regular convertible bond and a reverse convertible bond is the options attached to the bond. While ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center