What Does Shark Repellent Mean?
Shark repellent is a slang term for 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. These bylaws are meant to make the takeover less attractive or profitable to the acquisitive firm. They are also known as a “porcupine provision.”
- Shark repellent tactics refer to measures taken by a company to fend off unwanted or hostile takeover attempts.
- Shark repellents occupy a moral gray area because a company’s management may not always act in the best interests of shareholders in acquisitions that benefit the latter and not the former.
- Examples of shark repellents are golden parachute, macaroni defense, and poison pill.
Shark Repellent Explained
Most companies want to decide their own fate in the marketplace. So when a shark attacks, shark repellent actions can send off the predator 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 the measures could deny shareholders the potential for maximum shareholder value gains. Therefore, shark repellents occupy a moral gray area in management theory.
Shark repellents can be used to nullify takeover attempts that are not “pre-approved” by the management team of the target firm. For example, they might result in executive team layoffs. But they may result in a bump in share prices or the acquiring firm may offer a premium to existing shareholders for their shares.
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.
Shark Repellent Tactics
Tactics used to repel sharks differ based on the attack employed by the predator. Some of the more popular shark repellent tactics are outlined below:
Golden parachute: In a golden parachute, a company includes a large payout to a senior executive’s contract to make the takeover more expensive for the acquiring company. It is mainly used to protect senior management, who may get downsized during a takeover.
Poison pill: A poison pill is also known as a shareholder rights plan. It gives the existing shareholders the right to purchase additional shares at a discounted rate. The idea is to reduce the hostile bidder’s holdings by allowing other shareholders to load up on the company’s stock.
Staggered tenures: As the name indicates, a staggered-tenure tactic involves staggering or dividing the tenure for a board of directors to reduce their influence in critical decision-making. For example, companies can have a rolling tenure of two years or so for their board of directors. If a takeover offer is made during this time period, then delaying a vote on the matter can help companies avoid the offer.
Macaroni defense: A macaroni defense inserts a provision for the sale of a large number of bonds in the event of a takeover. The new bonds add to the overall costs that the acquiring company must pay in addition to the takeover price.
Shark Repellent Example
On Aug. 28, 2017, shoe retailer 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 interests 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.