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Control actions - Agency problems in control transactions

Q: What is the 'no frustration rule'? TQ

P 212-213 No frustration rule : during the course of an offer, or even before the date of the offer, if the board of the offeree company has reason to believe that a bona fide offer might be imminent, the board must not, without the approval of the shareholders in a general meeting, take any action which may result in any offer or bona fide possible offer being frustrated or in shareholders being denied the opportunity to decide on the merits.

Q: How does a 'poison pill' work? TQ

P 216 Poison pill: the company's charter provides that the crossing by an acquirer of a relatively low threshold of ownership triggers rights for target shareholders to acquire shares in either the target or the acquirer on favourable terms, from which the acquirer itself is excluded - The dilutive effect of the plan on the acquirer renders the acquisitions of further shares in the target fruitless or impossibly expensive.

4 important questions on Control actions - Agency problems in control transactions

What is the "no frustration rule'? TQ

P 212-213

No frustration rule: during the course of an offer, or even before the date of the offer, if the board of the offeree company has reason to believe that a bona fide offer might be imminent, the board must not, without the approval of the shareholders in a general meeting, take any action which may result in any offer or bona fide possible offer being frustrated or in shareholders being denied the opportunity to decide on the merits.

What is the effect of regulations that delay hostile or friendly bids, such as rules that require a bid to be open for a minimum period so that shareholders atre not pressured into accepting the offer? TQ

P 214

Any regulation that delays the consummation of a hostile or friendly bid increases the likelihood of an auction by providing time for another bidder to enter.
- Sometimes, these are known as "white knights", usually sought after by the incumbent management.
- First bidders often lose out if a competitor emerges

How does a "poison pill' work? TQ

P 216

Poison pill: the company's charter provides that the crossing by an acquirer of a relatively low threshold of ownership triggers rights for target shareholders to acquire shares in either the target or the acquirer on favourable terms, from which the acquirer itself is excluded
- The dilutive effect of the plan on the acquirer renders the acquisitions of further shares in the target fruitless or impossibly expensive.

What are the six categories of pre-bid defensive measures? TQ

P 222-223

1. Barriers to the acquisition of shares in the company
2. Obstacles to gaining control in the general meeting
3. Limits on the ability to control the board of directors
4. Arrangements preventing control of the company's assets
5. The creation of financial or management problems for the acquirer as a result of the acquisition
6. Actions raising regulatory issues