ESOPs AS AN ANTI-TAKEOVER DEFENSE

Previously, ESOP is made by the

company with the purpose of
employee respression
Now on, ESOP become an Anti-
takeover Defense
PolaroidShamrock Holdings takeover
battle in 1988.
 Effectiveness of ESOPs as an
Anti-takeover Defense

ESOPs compare favorably even with

poison pills.
poison pills still the most important
anti- takeover defense in the 2000s.
ESOPs only a substitutes for other
anti-takeover defenses such as
poison pills.
 ESOPs and SHAREHOLDER WEALTH

ESOPs may have an impact on

shareholder wealth in two opposing
ways.
1. provide tax benets to corporations
= lower their tax liabilities =
increasing SH wealth
2. used as an antitakeover defense =
reducing shareholder wealth
. Further analysis is needed to prove
both of two impact
ESOPs and LBO
 Leverage ESOPs Process
ESOPs may be used to lower the cost of
the LBO by taking advantage of the tax
deductions allowable under the law.
LESOP uses the loan proceeds to
purchase stock in the new corporation
rather than to purchase assets.
The new corporation uses the proceeds
of the sale to buy the assets of the
parent corporation.
 Step 1. A new company is formed, which will be the
division in an independent form.
Step 2. The management of the division, which will
constitute the new owners of that part of the parent
company.
Step 3. An ESOP for the new company is established.
The ESOP negotiates with a bank or other lenders for a
loan.
Step 4. Then the ESOP uses its loan proceeds to
purchase newly issued stock of the new company.
Step 5. The new company agrees to make tax-
deductible contributions to the ESOP for the repayment
of the ESOPs debt.