Anti-Takeover Defenses

Q: What is the board’s role in preparing for and responding to unsolicited bids for company stock (aka “hostile takeovers”)?

A: This memo addresses the director’s fiduciary role in hostile takeovers and discusses how directors can build a company’s takeover defenses. These broad topics are covered in the following sections:

1. Directors’ fiduciary duties in hostile takeovers

2. Rules of the road

3. Proxy advisor policies on poison pills

4. Poison pills and other anti-takeover protections

5. Judicial standards for viewing director actions in takeover resistance

6. Recommended board practices for anti-takeover defenses

7. Additional resources

8. Glossary of poison pills

Directors’ Fiduciary Duties in Hostile Takeovers

All public companies are potentially vulnerable to a change of control that the current board does not approve. While such unsolicited or "hostile" bids are not common—occurring in only 15 percent of U.S. corporate acquisitions in 2021 according to Paul Weiss —they can be triggered by a wide variety of causes (for example industry disruptions or regulatory shocks), and can happen under a variety of market conditions. A bear market can make a company vulnerable to takeover due to its depressed stock price, a bull market can make an acquirer overconfident and thus more aggressive, and stock volatility can create both conditions. One 2022 review of the literature on merger waves points to overvaluation of acquirer equity as a significant driver of hostile bids, along with market volatility and target company uncertainty.