All bids that are made between companies are not always welcomed with open arms from

the
target company’s board of directors. In that case the bid is recognized as hostile, also called
unconsolidated bid. This occurs when the acquiring company is trying to acquire the target
company directly through its shareholders rather than through a mutual agreement with the
target company’s board of directors. The expression of hostile takeover has its roots in the
negative attitude expressed from the board of directors of the targeted company.
The reasons for the targets board of directors’ negative attitude can perhaps be explained by
several reasons and not always related to the valuation of the actual bid. Some of them are;
the board of directors’ fear that the acquisition will have a negative effect on the company’s
growth, strategy, revenues or dividend, they may also experience fear of losing their jobs by
being replaced by the biding company’s employees.
When facing a hostile takeover through a hostile bid, the board of directors will act
accordingly to protect their independence and current management or to ensure that the
hostile bidder is pressured to sweeten their bid further. Often, the main purpose of the chosen
defense strategy is to make the acquisition more costly or time consuming and, in such way,
making the targeted company less attractive due to the rise in cost which follows. This can be
done through several different ways and these measures are commonly called defense
strategies, shark repellent tactics or antitakeover measures. These can be used in a reactive
approach to fend off a presented hostile bid or be used in a proactive approach to make sure
that future raids from targeting companies are slowed down or even hindered.
These different measures can be divided in to proactive and reactive strategies, depending on
when a company decides to adapt it. As their name suggests, a proactive measure is used to
make the company less attractive before the actual hostile bid presents itself and the later one
is implemented in connection to the hostile bid.

Proactive Defense Measures

1. Staggered Board of Directors
This defensive tactic hinges on making it time-consuming to vote out an entire board of
directors, thus making a proxy fight a challenge for the prospective raider. Instead of having
the entire board come up for election at the same time, a staggered board of directors means
that directors are elected at different times for multiyear terms.
Since the raider is eager to fill the company's board with directors that are friendly to the
takeover plans, having a staggered board means that it will take time for the raider to control
the company via a proxy fight. The target company is hoping the raider will lose interest
rather than engage in a protracted fight. While employing a staggered board of directors
could benefit company management, there is no direct benefit to shareholders.

Advantages/Importance of Staggered board of directors

 It avoids any hostile takeovers and keeps the target company away
from any undue influences. It takes at least a year plus to completely acquire
the target company under this structure. Depending upon the number of seats
of each class and the remaining tenure thereof.
 As the authority does not keep on changing continuously, there is
continuity in top-level management. Every time at the time of the election,
there is some veteran member on the board. And so, this avoids additional
training costs to the new members on board.
 The Staggered Board focuses on long term profits and not short-term
profits, which enhances growth.
 It gives a boost to profitability and flawless decisions. And thus
enhances the Corporate Governance of the company.
 This structure helps in the corporate re-structuring of the company
from time to time. The Company can keep important and/or experienced
people for the long term and so on.
 Even if a hostile takeover is taking place, the Acquiring Company will
not get full control instantly. In the 1st year, only one class would be open for
election. And later on, other classes will be opening up over the years.
 The managers of the company can give their best without any fear of
takeovers under this board structure. And so this structure increases
productivity at the managerial level.
 This structure reduces the influence of cumulative voting. All
shareholders, including minority shareholders, get enough weight.

Disadvantages / Criticism of Staggered Board

 One of the biggest limitations of the Staggered Board is that shareholder’s interest is
not served.
 Mostly the decisions are taken in the best interest of management and not
shareholders. 
  Staggered Board has given lesser shareholders returns than a company led by a
normal Board of Directors. In the case of hostile takeovers, the Acquiring Company
has enough capacity to provide existing shareholders a premium over their shares.
This structure, however, well avoids such premium advantage to the existing
shareholders.
 The second criticism is that since few directors are for a longer tenure in the company,
it becomes difficult to expedite change. The veteran Board of Directors may not be
flexible enough. This situation, many times reduces the value of the company. All
these criticisms are non-exhaustive in nature.
1. Poison Pill
The term poison pill refers to a defense strategy used by a target firm to prevent or discourage
a potential hostile takeover by an acquiring company. Potential targets use this tactic to make
them look less attractive to the potential acquirer. Although they are not always the first and
best way to defend a company, poison pills are generally very effective.
A company targeted for an unwanted takeover may use a poison pill to make
its shares unfavourable to the acquiring firm or individual. Poison pills also significantly raise
the cost of acquisitions and create big disincentives to deter such attempts completely.
The mechanism protects minority shareholders and avoids the change of control of company
management. Implementing a poison pill may not always indicate that the company is not
willing to be acquired. At times, it may be enacted to get a higher valuation or more
favourable terms for the acquisition.
Since shareholders who are the actual owners of a company can vote by majority to favour
the acquisition, the target company management deploys a poison pill, which is usually
a specially designed shareholder rights plan with certain conditions drafted specifically to
thwart attempted takeovers.
Types of Poison Pills
There are two types of poison pill strategies: the flip-in and flip-over. Of the two types, the
flip-in variety is more commonly followed.
a) Flip-in Poison Pill
A flip-in poison pill strategy involves allowing the shareholders, except for the acquirer, to
purchase additional shares at a discount. Though purchasing additional shares provides
shareholders with instantaneous profits, the practice dilutes the value of the limited number of
shares already purchased by the acquiring company. This right to purchase is given to the
shareholders before the takeover is finalized and is often triggered when the acquirer amasses
a certain threshold percentage of shares of the target company.
b) Flip-Over Poison Pill
A flip-over poison pill strategy allows stockholders of the target company to purchase the
shares of the acquiring company at a deeply discounted price if the hostile takeover attempt is
successful. For example, a target company shareholder may gain the right to buy the stock of
its acquirer at a two-for-one rate, thereby diluting the equity in the acquiring company. The
acquirer may avoid going ahead with such acquisitions if it perceives a dilution of value post-
acquisition.
Advantages of the Poison Pill

 It saves the company against hostile takeovers and keeps the control and management
the same.
 The interest of Minority Shareholders remains safe.
 It opens doors for better acquiring prospects in the future. As it is not always the case
that the target company does not want to get acquired ever. It can prefer a harmonious
takeover over a hostile takeover with a better value for existing stakeholders. 
 Poison Pills allow the shareholders (actual owners of the company) to make decisions
regarding the timing, value, and strength of acquisition.
 This strategy, even if not successful in avoiding hostile takeovers fully, at least helps
the acquisition process to slow down and forces the acquirer to negotiate the terms.
Thus, brings him to the negotiation table.

Disadvantages of the Poison Pill

 As the purchasing of additional shares takes place at a discount rate, the value of the
company falls by impacting the shareholder’s value adversely.
 This aggressive strategy discourages Intuitional investors like Foreign Direct
Investors (FDIs) and Foreign Portfolio Investors (FPIs) from further investing in the
company.
 Sometimes, this strategy encourages non-productive managers to continue to work
and halt the growth and expansion of the company.
 If the target company is not efficiently using the resources, this strategy halts the
change and efficient usage of resources by the acquiring company. 
  If the Acquiring Company is very tough, this strategy might not influence its decision
and would rather negatively impact the target company only. 

Reactive Defense Measures

1. Crown Jewel
By implementing a defense strategy such as the Crown Jewel defense, the target company has
the right to sell of the entire or some of the company’s most valuable assets (Crown Jewels)
when facing a hostile bid, in hope to make the company less attractive in the eyes of the
acquiring company and to force a drawback of the bid. Another way of implementing this
type of defense strategy is for the target company to sell its Crown Jewels to another friendly.
company (White Knight) and later on, when and if the acquiring company withdraws its
offer, buy back the assets sold to the White Knight at a fixed price agreed in advance
(Weston, 2001)
2. Litigation
Litigations are ways for companies to stall a hostile attack but are often not effective against
long-term bidders. The litigations often involve pursuing legal injunction, filing antitrust
litigations, restraining orders or filing a lawsuit against the bidding company. This pressures
the bidder to gather information to prove its legitimacy of the takeover, often towards the
institution in each country that handles these matters.
During the time the bidder is preparing and presenting its legal preferences, the targeted
company receives a space to implement other defense measures or to pressure the bidder to
sweeten the bid additionally in exchange drop the litigations.
These litigations can also be a step in the board of director’s propaganda against the bidder,
with intentions to make its shareholders react more harmfully towards the bid in general by
implying that there might be something wrong with their intentions. Also, these litigations
often pressure the bidding company to reveal its post-acquisitions plans for the company,
which may even more strengthen the board of directors arguments towards the bid.