In corporate defense against a hostile takeover, which strategy involves granting a potential acquirer the right to purchase a block of the target company's stock at a favorable price to discourage the bid?

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Multiple Choice

In corporate defense against a hostile takeover, which strategy involves granting a potential acquirer the right to purchase a block of the target company's stock at a favorable price to discourage the bid?

Lockup defenses create a prearranged incentive by giving a potential acquirer the right to buy a substantial block of the target’s stock at a favorable price, which makes pursuing a hostile bid more costly or less appealing. By locking up a large portion of shares for a specific bidder, the tactic reduces the pool of shares available to others and can push up the cost of a competing offer, effectively deterring the bid or nudging the target toward negotiation with the chosen bidder. This approach is distinct from other defenses: a poison pill primarily dilutes the bidder’s potential ownership, a white knight seeks a friendly counterbid from a more acceptable buyer, and a golden parachute is compensation for executives if control changes hands. The lockup directly ties a lucrative stock sale to a preferred bidder, which is why it best fits the described strategy.

Lockup defenses create a prearranged incentive by giving a potential acquirer the right to buy a substantial block of the target’s stock at a favorable price, which makes pursuing a hostile bid more costly or less appealing. By locking up a large portion of shares for a specific bidder, the tactic reduces the pool of shares available to others and can push up the cost of a competing offer, effectively deterring the bid or nudging the target toward negotiation with the chosen bidder. This approach is distinct from other defenses: a poison pill primarily dilutes the bidder’s potential ownership, a white knight seeks a friendly counterbid from a more acceptable buyer, and a golden parachute is compensation for executives if control changes hands. The lockup directly ties a lucrative stock sale to a preferred bidder, which is why it best fits the described strategy.

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