FREE online courses on Mergers & Acquisitions - Chapter 7 - Changes to the Corporate Charter

 

If management can obtain shareholder approval, several changes can be made to the Corporate Charter for discouraging mergers. These changes include:

 

Staggered Terms for Board Members

 

Only a few board members are elected each year. When an acquiring firm gains control of the Target Company, important decisions are more difficult since the acquirer lacks full board membership. A staggered board usually provides that one-third are elected each year for a 3 year term. Since acquiring firms often gain control directly from shareholders, staggered boards are not a major anti-takeover defense.

 

Super-majority Requirement

 

Typically, simple majorities of shareholders are required for various actions. However, the corporate charter can be amended, requiring that a super-majority (such as 80%) is required for approval of a merger. Usually an "escape clause" is added to the charter, not requiring a super-majority for mergers that have been approved by the Board of Directors. In cases where a partial tender offer has been made, the super-majority requirement can discourage the merger.

 

Fair Pricing Provision

 

In the event that a partial tender offer is made, the charter can require that minority shareholders receive a fair price for their stock.  Since many states have adopted fair pricing laws, inclusion of a fair pricing provision in the corporate charter may be a moot point. However, in the case of a two-tiered offer where there is no fair pricing law, the acquiring firm will be forced to pay a "blended" price for the stock.

 

Dual Capitalization

 

Instead of having one class of equity stock, the company has a dual equity structure. One class of stock, held by management, will have much stronger voting rights than the other publicly traded stock. Since management holds superior voting power, management has increased control over the company. A word of caution: The SEC no longer allows dual capitalization's; although existing plans can remain in effect.