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 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. Mutual Funds & ETFs

    Corporate Takeover Defense: A Shareholder's Perspective

    Find out the strategies corporations use to protect themselves from unwanted acquisitions.
  6. Investing

    A Guide To Spotting A Reverse Merger

    This corporate action can be profitable for investors who know what to look for.
  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. Bonds & Fixed Income

    Trademarks Of A Takeover Target

    These tips can lead you to little companies with big prospects.
  9. Options & Futures

    Pinpoint Takeovers First

    Use these seven steps to discover a takeover before the rest of the market catches on.
  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. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  2. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  3. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  4. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  5. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  6. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
Trading Center