Takeover defense measures such as poison pills and staggered boards are at their lowest levels in more than a decade, making U.S. companies more vulnerable at a time when hostile bids are expected to rise.

The number of staggered or classified boards among S&P 500 companies -- where only a handful of directors come up for election in any given year -- has fallen to 25 percent from nearly 62 percent in 2002, according to FactSet SharkRepellent.

Poison pills, which make it expensive for a hostile party to buy shares beyond a certain level, have declined to 11 percent from 60 percent over the same period -- although most companies keep such measures on the shelf, reinstating them quickly when a threat emerges.

Other defense provisions such as not allowing shareholders to call special meetings are down to 49 percent from 59 percent, and allowing directors to be removed only for cause is down to 35 percent from 52 percent, the FactSet data show.

Where it can make a difference is if there is an aggressive strategic buyer who wants to buy the company and put pressure on the board, said Richard Grossman, an M&A partner at law firm Skadden Arps.

If a target is vulnerable, they should really keep that in mind, because over the years it has become less of a taboo for strategic companies to go public and launch a hostile acquisition, he said.

Bankers and lawyers say the conditions are ripe for hostile and unsolicited bids to increase in 2012, as U.S. companies that held a record $2.12 trillion of cash in the third quarter look to buy growth in a weak economy and take advantage of rivals' depressed stock prices.

I would expect in the coming months when things get better, attorneys will get calls from issuers saying maybe you could do a defense profile for us and look at the charters and bylaws, said Robert Katz, an M&A partner at law firm Shearman & Sterling.


The decline in takeover defenses has been a steady, years-long trend, driven by demands from institutional shareholders and proxy advisers who argue that such measures can allow the board to entrench itself at the cost of investors.

Billionaire investor Carl Icahn, for instance, persuaded Navistar International Corp last month to declassify its board in return for not launching a proxy fight.

In general, public companies try to preserve their takeover defenses for as long as they can, said William Chandler, a former Delaware Court of Chancery judge.

Hostile bids remain rare, so boards, albeit sometimes with reluctance, generally opt to bow to the will of stockholders and eliminate these measures, Chandler said in e-mailed comments.

Institutional investors believe that structural defense provisions are not the best way to protect a company from an unfair takeover.

No shareholder has ever said that, 'I want to leave my company vulnerable so someone can steal it from me,' a corporate governance expert said. Shareholders, particularly institutional shareholders, put a lot of confidence in the shareholder vote as the ultimate anti-takeover defense.


U.S. companies are not oblivious to the looming threat, and they are not totally without defenses.

Certain U.S. state takeover statutes discourage an unwanted buyer from amassing a stake in a target company above a certain level -- 15 percent in the case of Delaware's Section 203.

Companies also try to limit their window of vulnerability to the annual meeting season through the use of advance notice and nomination bylaws, and limitations on stockholders' ability to call special meetings or to act by written consent, Chandler said.

Some 72 percent of companies in the S&P 500, for example, do not allow action by written consent, where a meeting is not needed, according to FactSet SharkRepellent. That number was around 73 percent in 2002.

Companies that are going public now are also coming out of the box with takeover defenses in place.

In the technology space -- one of the active sectors for aggressive bids -- LinkedIn Corp went public with a classified board. Groupon Inc and Zynga Inc, which is about to go public, do not have staggered boards, but both have dual-class share structures.

In the case of Groupon, the founders hold Class B shares that have 150 votes per share, representing 36.3 percent of the voting power.

Zynga has three classes of common stock. The stock offered to the public, Class A, has one vote per share, while the Class B and Class C have seven and 70 votes per share, respectively.


Defense provisions are just one aspect of a complex strategy that companies engage in when buying one another, and unwanted bids can succeed even when they are present.

But they can give the target board time to negotiate a better deal.

Earlier this year, packaging company Temple Inland Inc , which has a staggered board, put in a poison pill after an unwanted bid by rival International Paper Co . It agreed to sell after International Paper bumped up its bid.

In the real world, structural takeover defenses operate as devices to gain time and to gain negotiating leverage, and not as a complete bar to a transaction, Chandler said.

But these provisions can also help stop a hostile bidder.

Earlier this year, Ralcorp Holdings Inc kept unsolicited bidder ConAgra Foods Inc at bay.

Ralcorp had a staggered board and it adopted a poison pill after the bid. The company, which is incorporated in Missouri, also had added protection from state law that makes hostile takeovers difficult.

Hostile deals typically don't come up out of the woodwork. It's usually a result of weeks or months of discussions between the parties, Skadden's Grossman said. Having those exploratory discussions can be fraught with some risk if the acquirer decides to go hostile on you.

(Reporting By Paritosh Bansal, Nadia Damouni and Soyoung Kim; editing by John Wallace)