The idea of corporate takeover is getting common as the economy is boosting and revenue is increasing. Take over often takes place for a number of reasons like potential for significant revenue enhancement, expanding franchise, introducing operating cost. While most of the takeovers are friendly, means stakeholders support acquisition however sometimes it can be hostile when acquisition occurs against the consent of existing members of board. Old way to defend your company from potential takeovers is diminishing. The classical ‘poison pill’ arsenal is disappearing. The main reason hostile acquisition removal methods are applied because of ineffective management.
The poison pill method first used in 1982. This difference is also called a shareholder rights plan. To execute it, targeted companies raise its share price in a way that potential takeover cannot obtain a share without incurring massive expenses. There is also another method ‘flip-in pill’ version allows the company to issue preferred shares that only existing shareholders may buy. It was implemented in 2010 when James reannounced he had bought 15% of shares of Crooxs in an attempt to take over the company.
There are some other measures that Hongkong companies are using through state laws, section 203 allows delay of three years of hostile takeover unless potential buyers buys 75% of targeted share in a single go. As no buyers want to wait for 3 years so they eventually try negotiation and friendly deals with the target boards. Section 203 act came into force in 1989 but soon it went into criticism on the basis of constitutional challenges that 75% bidding allowed meaningful opportunity for success for bidders. However since the last 30 years not a single potential takeover has used its 75%, so making it less meaningful for bidders.
Further our constitution who said the constitutional provision for section 203 is flawed and is no longer valid. So if it ever gets invalidated, than Delaware and 32 other states and America will come under interrogation.
The time when these ‘poison pill’ and ‘flip in pill’ methods were used are long gone to say no to potential bidders. New artificial barriers are required to stop the takeovers. These barriers are for the companies who want to block the acquisition process not for the companies who want to accept the offer.