Page 142 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

128 The Complete Guide to Executive Compensation

a company to put an inside limit on the number of shares to be used as awards vs. options in
order to get a favorable rating from the institution on the proposal. An extreme example would
be limiting the percentage to about one-third on the belief that a present-value calculation
would equate one award to approximately three options.

Takeover Defenses
Few proposals draw more attention than antitakeover proposals. While management
describes them as shareholder-rights plans, they are typically called shark repellents. They are
directed toward proposed changes in the corporate charter and bylaws; typically, they fall into
one of the following categories:
Control of Board of Directors
• Board size To prevent a group that has taken control of a majority of outstanding
stock from expanding the number of directors and putting in enough of its own candi-
dates to achieve a majority, some companies have amended their charter requiring a
supermajority (e.g., 75 percent or 80 percent of the votes) to agree to the change.
• Classified or staggered board Directors are typically divided into three classes or
groups, each with a three-year term. Electing a third each year makes it more difficult
for a takeover bidder to quickly gain control of the board.
• Cumulative voting Takeover candidates would want to ensure that this is not
permitted, as it gives a shareholder the right to vote all of the shares for one board
candidate. The number of votes is equal to number of shares owned times the
number of board candidates. Thus, if a shareholder had 10,000 shares and there were
10 board candidates, the shareholder could cast 100,000 votes for one director.

Increased Cost of Transaction
• Convertible rights Shareholders of the target company are given the right to con-
vert their shares into shares of takeover company at a ratio unattractive to the bidder.
• Discount stock price Shareholders can buy stock in the target company at a deep
discount (e.g., half price), making it more expensive to bidder when these shares are
sold to the bidder.
• Fair price Bidder must pay all shareholders a price equal to the highest price the
bidder paid for any of the stock unless the takeover is approved by the board.
• Loan expense Company amends its loan agreements to make then immediately due
in event of a takeover.
• Pension rights Surplus pension funds are used for improved benefits to prevent
termination of plan and use of excess funds.

• Poison pill Whether convertible to cash and/or stock of the target company, they
increase the acquisition cost through the grant of preferred stock and/or warrants to
buy additional stock at favorable costs.

• Redemption rights Shareholders have the right to sell the target-company stock at
a significant premium (may be equal to fair price).