Center for Law and Economic Studies
The tactical history of the tender offer movement resembles an unrestrained arms race.1 Faced with offeror assaults in the form of Saturday night specials, various types of bear-hugs, godfather offers, and block purchases,2 target management responded with equally intriguing defensive tactics: the black book, reverse bear-hug, sandbag, show stopper, white knight, and, drawing directly on military jargon, the scorched earth.3 But however varied the labels given particular defensive strategies, they share the common characteristic of being responsive: They are available only after an offer is made and the battle for the target's independence joined. From the target's perspective, what was missing from the defensive arsenal was a deterrent- a tactic that would convince a potential offeror not even to attempt the attack, thereby not only saving the target the substantial costs associated with tender offer conflicts4 but, more importantly, eliminating the not insubstantial risk that all defenses would fail and the offer prove successful.5
Shark repellent amendments are intended to fill this gap in a prospective target's defenses. The idea is to amend the target's articles of incorporation to make it a less desirable or more difficult acquisition, and thereby to encourage the "shark" to seek a more appetizing or more easily digested alternative.6 If successful, however, the tactic is not without cost. To the extent that shark repellent amendments deter potential offerors, they also have the unavoidable effect of preventing shareholder access to offers made at substantial premiums over market price, and at the same time insulating incumbent management from the principal mechanism by which they might be dislodged unwillingly from their positions.
Ronald J. Gilson,
The Case Against Shark Repellent Amendments: Structural Limitations on the Enabling Concept,
Stan. L. Rev.
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