DEFINITION of 'Scorched Earth Policy'

A takeover prevention strategy in which the target company seeks to make itself less attractive to hostile bidders by selling off assets, taking on high levels of debt or initiating other activities that may damage the company if it is purchased. In extreme cases, a scorched earth policy might end up being a “suicide pill.”

BREAKING DOWN 'Scorched Earth Policy'

Companies using a scorched earth policy are engaging in a last ditch effort. The policy is similar to how a retreating army may destroy crops and infrastructure to prevent their use by invaders. If the target company goes through with selling off important assets, it may wind up unable to recover if a hostile takeover falls through. Rather than sell assets or take on debt today, the company may instead enact provisions that provide senior management with substantial payouts, such as golden parachutes, if a new management team is brought on.

If a takeover is imminent, the board of directors may not be able to go through with a scorched earth policy if it is not in the best interest of shareholders. The hostile company may look for an injunction against the board’s activities, and in some jurisdictions may be able to prevent the board from stopping the takeover bid. For example, a steel company may threaten to purchase a manufacturer embroiled in lawsuits from making poor quality parts. In this case, the target company is purchasing the future liabilities associated with any lawsuit settlement.

RELATED TERMS
  1. Hostile Takeover

    The acquisition of one company (called the target company) by ...
  2. Takeover

    A corporate action where an acquiring company makes a bid for ...
  3. Hostile Bid

    A specific type of takeover bid that is presented directly to ...
  4. Black Knight

    A company that makes a hostile takeover offer for a target company. ...
  5. Takeover Bid

    A type of corporate action in which an acquiring company makes ...
  6. "Just Say No" Defense

    A strategy used by corporations to discourage hostile takeovers ...
Related Articles
  1. Small Business

    What is a Takeover?

    A takeover happens when one company makes a bid to acquire a target company.
  2. Investing

    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 ...
  3. Investing

    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.
  4. Investing

    Pinpoint Takeovers First

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

    Reverse Takeover

    Learn more about this type of takeover and how companies use it to avoid IPOs.
  6. Investing

    Corporate Takeover Defense: A Shareholder's Perspective

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

    Trademarks Of A Takeover Target

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

    Poison Pill

    A poison pill is a corporate maneuver put in place to try and prevent a hostile takeover. The target corporation uses this strategy to make its stock less attractive to the acquirer. This is ...
  9. Investing

    Understanding Rare Earth Metals

    Rare earth metals are quickly becoming a sought-after global commodity. Find out what they are and how you can invest.
  10. Investing

    Why Do Companies Care About Their Stock Prices?

    Read on to learn more about the nature of stocks and the true meaning of ownership.
RELATED FAQS
  1. 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 >>
  2. How can a company buy back shares to fend off a hostile takeover?

    Learn about why a business might use a stock buyback to thwart a hostile takeover attempt by reducing its total assets and ... 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. What happens to the shares of a company that has been the object of a hostile takeover?

    Learn about the effect on the share price of companies that are targets of hostile takeovers, which are tactics used by famed ... Read Answer >>
  5. What's the difference between a merger and a hostile takeover?

    Understand the difference between a merger and a hostile takeover, including the different ways one company can acquire another, ... Read Answer >>
  6. 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 >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center