10/30/2025
Analysis: Hostile M&A Activity Could Spur Comeback of Takeover Defenses
Bloomberg Law (10/30/25) Aquila, Frank; Yuh, Catherine
Unsolicited mergers and acquisitions bids in 2025 have made for eye-popping headlines, and robust unsolicited M&A activity is likely to continue, even in volatile markets. A public acquisition bid places immense pressure on the target company’s board and management. Unsolicited bids typically appear with little notice and require a prompt and cohesive response. Delays or perceived inconsistencies in the board’s response undermine the company’s position. The response to an unsolicited bid can put further stress on a board’s decision-making, as it can generate tremendous uncertainty and unease among the company’s various constituencies. The need for a quick response to an unsolicited M&A proposal underscores why companies must be prepared, both to avoid becoming the target of a hostile offer and to respond to an offer once made. Because the board is ultimately responsible for evaluating a proposed deal, directors must be aligned on key strategic issues. When a board is attuned to the arguments for, and likelihood of, alternative transactions, it can assess an unsolicited proposal’s merits with a higher degree of rigor. In building out its defensive toolkit, a company needs to develop a strong investor relations team with a strategy. A company must be able to show its shareholders that its board and management are focused on the company’s performance and stock price. Because goodwill with shareholders goes a long way in the face of an unsolicited bid, the company must also be proactive about investor outreach and engagement. A company’s strongest takeover defense is a tactical shareholder rights plan (commonly known as the “poison pill”). While their mechanics may vary, poison pills generally entail the issuance of rights to shareholders to purchase additional stock at a steep discount. When an unwelcome acquirer crosses a specified ownership threshold without board approval — often 15% — the poison pill activates, triggering the purchase rights for all holders except the party that exceeded the threshold. This results in significant dilution of the hostile acquirer. Because poison pills are such powerful deterrents to unsolicited bids, institutional shareholders and proxy voting advisers have long argued that directors only adopt poison pills to entrench themselves and engage in actions that destroy shareholder value. The efforts of institutional shareholders and proxy voting advisers have led to a prevailing belief that poison pills are contradictory to shareholders’ best interests and have driven them largely out of fashion. However, the poison pill has made a bit of a comeback in the U.S., and its recent use outside the country necessitate an awareness of its limitations. A hostile acquirer can also turn to a proxy contest to circumvent a poison pill. In a proxy contest, an acquiring party convinces other shareholders to vote with it to win control of the board or force desired changes in business strategy. Despite its potential limitations, however, the poison pill can effectively stall for time so that a board may more thoroughly assess an unsolicited offer and create more leverage in compelling negotiations between the acquirer and the board. The staggered board was once seen as one of the strongest shields against unsolicited M&A bids. A company with a staggered board divides its directors into three classes and puts only one class up for election at a given annual meeting. As a result, only one-third of the directors can be replaced in any year, dragging out the time required for a hostile acquirer to seize control of the board while simultaneously giving the board more time to respond to takeover bids. Although it was historically a primary line of defense against unsolicited bids, only 10% of S&P 500 companies today feature a staggered board, down from 60% in 2006. This precipitous decline is the result of pressure from activist investors who cite the staggered structure as an impediment to effective corporate governance. Such activists criticize the staggered board for encouraging board entrenchment, which they argue discourages responsiveness to shareholders. Nevertheless, it’s unlikely that the staggered board will disappear anytime soon. Because the staggered structure eliminates the pressure of annual reelections, a board that is staggered can more easily pursue a long-term business strategy, which is ideal for younger companies and those that prioritize innovation or invest heavily in research and development activities. While the poison pill and staggered board are widely recognized as the most effective takeover defenses, companies may consider implementing other safeguards. Directors should be creative in identifying new defenses that are better adapted to the current environment. Activists are increasingly coupling traditional media forms with social media — including platforms such as Instagram, Reddit, TikTok, and X — to find support for their messaging. Last October, Elliott Management added yet another digital weapon to activists’ arsenal by launching a podcast as part of its campaign against Southwest Airlines (LUV). Though activists have invested considerable resources into making their campaigns more media-savvy in recent years, “Stronger Southwest” marks the first time the podcast medium has been used to directly influence a company’s shareholder base. Moreover, it swiftly reached a critical mass of shareholders—within just a week of publication, its first episode amassed nearly 3,000 views on YouTube, with more listeners tuning in through Spotify and Apple. Directors should be aware of novel media forms, which may be particularly effective at influencing retail investors or other smaller, individual investors. Significant unsolicited M&A activity will likely continue in the coming years, given market and policy uncertainty. Consequently, once-popular takeover defenses may see renewed use, especially as boards step up their efforts to protect falling stock prices and deliver long-term value. Companies will also adjust their defense strategies to account for new trends in the activist space. The increasingly aggressive tactics that activists and other acquirers are adopting suggest unsolicited and hostile activity will remain an important component of the M&A landscape. A strong preparedness and response strategy will be crucial in such an environment.
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