How Can a Corporation Defend against a Hostile Takeover?

A poison pill is a shareholder rights plan that dilutes the bidder's stake if a threshold ownership level is crossed without board approval. The plan grants existing shareholders the right to purchase additional shares at a discount, which becomes exercisable upon a triggering event, typically crossing 15 to 20 percent ownership. New York courts, including the Delaware Court of Chancery, which applies to many New York corporations chartered in Delaware, have upheld poison pills as a valid defensive tactic when the board demonstrates that the pill was adopted in response to a genuine threat and was not preclusive or coercive. The practical significance lies in the timing and documentation of the board's decision: a pill adopted after a bidder has already announced its intentions may face less judicial scrutiny than one adopted in advance, because courts examine whether the board had time to gather information and evaluate alternatives before acting.

Yes, a crown jewel defense involves selling or agreeing to sell the corporation's most valuable assets if the hostile bidder succeeds, making the target less attractive. A white knight is a friendly third party that the board recruits to make a competing offer. Both tactics are legal, but they require careful board process. The board must demonstrate that it explored the crown jewel sale or white knight alternative as part of a deliberate evaluation of the bidder's offer and the corporation's strategic options. Courts scrutinize whether the board was genuinely shopping for alternatives or simply using the tactic to entrench management. The distinction matters because entrenchment violates the business judgment rule, whereas a good-faith search for a superior proposal does not.

Shareholders must vote on any merger or acquisition that is consummated through a formal merger agreement. A tender offer that does not trigger a merger vote initially may later require shareholder approval depending on the bidder's intentions and the corporation's charter. Under New York law and Delaware law, shareholders cannot be stripped of their voting rights on a fundamental transaction. However, the board can influence the timing and terms of a shareholder vote through defensive tactics. For example, a staggered board or a supermajority voting requirement can delay a vote or raise the threshold for approval, giving the board time to solicit a superior proposal or allowing shareholders to reconsider the bidder's offer as additional information emerges.

A board that refuses to negotiate or communicate with a hostile bidder faces legal risk if shareholders later determine that the board failed to maximize shareholder value. Courts have held that boards cannot simply ignore a credible offer; instead, they must engage in a process that allows them to evaluate the bidder's intentions, assess whether a superior proposal is available, and communicate transparently with shareholders. In practice, even a board that opposes a bid typically enters into confidentiality and standstill agreements with the bidder to obtain financial information and assess the offer's seriousness. Refusal to engage may be viewed as a failure of process, particularly if the bidder's offer is ultimately accepted by shareholders despite the board's opposition.

The business judgment rule presumes that directors acted in good faith, on an informed basis, and in a manner they reasonably believed to be in the corporation's best interest. To rebut this presumption, a shareholder plaintiff must demonstrate that the board lacked information, acted in bad faith, or that the defensive measure was so disproportionate to the threat that no reasonable director would adopt it. From a practitioner's perspective, the board's documentation of its decision-making process is critical: meeting minutes, financial advisor opinions, and written board resolutions that explain the rationale for each defensive tactic significantly improve the likelihood that a court will uphold the board's actions under the business judgment rule. Conversely, a board that acts hastily or without adequate process faces a shifted burden of proof, requiring directors to affirmatively demonstrate that the defense was reasonable.

Once a board enters into negotiations with a hostile bidder, it must continue to act fairly toward all potential bidders and avoid favoring one bidder over another absent a legitimate business reason. This duty includes an obligation to disclose material information to shareholders and to avoid using confidential information obtained from one bidder to benefit a competing bidder. In New York courts and Delaware courts, breaches of this duty have resulted in injunctions blocking mergers and awards of damages to shareholders. The practical implication is that boards must maintain careful records of all communications with bidders, financial advisors, and legal counsel, and must document the rationale for any decision to favor one bidder or to terminate discussions with another.