What Does Shark Repellent Mean?
Shark repellent is a slang term for any one of a number of measures taken by a company to fend off an unwanted or hostile takeover attempt. In many cases, a company will make special amendments to its charter or bylaws that become active only when a takeover attempt is announced or presented to shareholders with the goal of making the takeover less attractive or profitable to the acquisitive firm. It is also known as a "porcupine provision."
Shark Repellent Explained
Most companies want to decide their own fate in the marketplace, so when a shark attacks, shark repellent can send the predator off to look for a less feisty target. While the concept seems reasonable based on the principle of self-determination, many shark repellent measures are not in the best interests of shareholders because they could deny them the potential for maximum shareholder value gains.
It is widely held that board directors have a fiduciary responsibility to shareholders and therefore should be open to any bid — hostile or not. Spraying shark repellent is not generally considered a shareholder-friendly action by the board. Some examples of shark repellent are poison pills, scorched earth policies, golden parachutes, and safe harbor strategies.
Shark Repellent Example
On August 28, 2017, shoe retailer the Finish Line announced its Board of Directors had adopted a shareholder rights plan (poison pill) "to protect the best interests of Finish Line shareholders. The [plan] is intended to reduce the likelihood that any person or group would gain control of Finish Line through open market accumulation or coercive takeover tactics that the Board of Directors determines are not in the best interest of the Company and its shareholders." Details of this shark repellent were disclosed in a Form 8-K filing by the company.
The day after the announcement of the adoption of the poison pill plan, the company's stock plummeted as much as 34% from the previous closing price and ended the day down around 18%. With no other negative news impacting the company that day, it is safe to assume that shareholders were repelled themselves by the shareholder rights plan.