What Does Shark Repellents Mean?
A shark repellent is a strategy taken by public companies to ward off unwanted takeovers. It is a generic term for periodic or continuous measures taken by the management of a firm to discourage unwanted or hostile takeovers. These measures benefit the firm’s management more than the stockholders, as they damage the firm's financial position. Some of the common measures include macaroni defense, poison pills and golden parachute.
Divestopedia Explains Shark Repellents
The term shark repellent has its origin in the practice of coating surfboards with an oral shark repellent to render the surfboard foul-tasting to a shark. All of the following strategies are designed to 'leave a bad taste in the shark's (takeover investor's) mouth' and make a takeover less attractive or profitable for the acquiring firm. Popular examples of shark repellents include:
- A special charter of bylaws that are activated when a hostile takeover attempt is encountered.
- Macaroni Defense - A firm may issue a large number of bonds with the provision that, if the firm is taken over, they must be redeemed at the stipulated high price.
- Golden Parachute - A contract with top executives that makes it extremely expensive to dispose of existing management. This may involve stock options, liberal severance pay, etc.
- Defensive Merger - Merge with another firm and thereby create anti-trust or other regulatory problems for a takeover transaction.
- Super Majority Provision - This requires obtaining two-thirds or three-fourths of the majority votes instead of a simple majority to ratify a takeover by an outsider. This feat is almost impossible to achieve.
- Staggered Board of Directors - Makes it difficult for the corporate raider to install a majority of directors.
Although shark repellents are not that relevant to privately owned mid-market companies, understanding methods of protecting a shareholder's ownership interest is extremely important. Documents such as unanimous shareholder agreements and buy-sell agreements that outline how a company's shares are bought and sold need to carefully constructed.