Blank Check 1

2. Blank Check 1 Blank Check preferred stock is stock over which the board of directors has broad authority to determine voting, dividend, conversion, and other rights. While it can be used to enable a company to meet changing financial needs, its most important use is to implement poison pills or to prevent takeover by placing this stock with friendly investors. Because of this role, blank check preferred stock is a crucial part of a “delay” strategy.

3. Blank Check 2 Preferred stocks offer a company an attractive alternative form of financing. In most cases, a company can defer dividends by going into arrears without much of a penalty or risk to their credit rating. With traditional debt, payments are required and a missed payment would put the company in default. Occasionally companies use preferred shares as means of preventing hostile takeovers, creating preferred shares with a poison pill or forced exchange or conversion features that exercise upon a change in control. Some corporations contain provisions in their charters authorizing the issuance of preferred stock whose terms and conditions may be determined by the board of directors when issued. These "blank checks" are often used as takeover defense (see also poison pill). These shares may be assigned very high liquidation value that must be redeemed in the event of a change of control or may have enormous supervoting powers.

4. Arrears The term in arrears is also used in many contexts to refer to payments made at the end of a period, as distinct from in advance, which are payments made at the start of a period. For instance, rent is usually paid in advance, but mortgages in arrears (the interest for the period is due at the end of the period). Employees' salaries are usually paid in arrears. In other contexts, payment at the end of a period is referred to by the singular arrear, to distinguish from past due payments. For example, a housing tenant who is obliged to pay rent at the end of each month, is said to pay rent in arrear, while a tenant who has not paid rental due for 90 days is said to be three months in arrears. Precise usage may differ slightly (e.g. "in arrear" or "in arrears" for the same situation) in different English-speaking countries.

5. Classified Board 1 A Classified Board (or “staggered” board) is one in which the directors are placed into different classes and serve overlapping terms. Since only part of the board can be replaced each year, an outsider who gains control of a corporation may have to wait a few years before being able to gain control of the board. This slow replacement makes a classified board a crucial component of the Delay group of provisions, and one of the few provisions that clearly retains some deterrent value in modern take-over battles [Daines and Klausner 2001]. A staggered board of directors or classified board is a prominent practice in US corporate law governing the board of directors of a company, corporation, or other organization in which only a fraction (often one third) of the members of the board of directors is elected each time instead of en masse (where all directors have one-year terms). Each group of directors falls within a specified "class"—e.g., Class I, Class II, etc.—hence the use of the term "classified" board.[1]

6. Classified Board 2 In publicly held companies, staggered boards have the effect of making hostile takeover attempts more difficult. When a board is staggered, hostile bidders must win more than one proxy fight at successive shareholder meetings in order to exercise control of the target firm. Particularly in combination with a poison pill, a staggered board that cannot be dismantled or evaded is one of the most potent takeover defenses available to U.S. companies. Institutional shareholders are increasingly calling for an end to staggered boards of directors—also called "declassifying" the boards. The Wall Street Journal reported in January 2007 that 2006 marked a key switch in the trend toward declassification or annual votes on all directors: more than half (55%) of the S&P 500 companies have declassified boards, compared with 47% in 2005.[3] Similar staggering of terms is used for that reason in the election of U.S. Senators, members of the Securities and Exchange Commission, and other public bodies. By design, it has the effect of limiting control of a representative body (a board of directors, the Senate, the SEC, etc.) by the body being represented (shareholders, voters, the President). The use of a staggered board can minimize the impact of cumulative voting.[4]

7. Proxy fight A proxy fight or proxy battle is an event that may occur when a corporation's stockholders develop opposition to some aspect of the corporate governance, often focusing on directorial and management positions. Corporate activists may attempt to persuade shareholders to use their proxy votes (i.e. votes by one individual or institution as the authorized representative of another) to install new management for any of a variety of reasons. Shareholders of a public corporation may appoint an agent to attend shareholder meetings and vote on their behalf. That agent is the shareholder's proxy. In a proxy fight, incumbent directors and management have the odds stacked in their favor over those trying to force the corporate change. These incumbents use various corporate governance tactics to stay in power including: staggering the boards (i.e. having different election years for different directors), controlling access to the corporation's money, and creating restrictive requirements in the bylaws. As a result, most proxy fights are unsuccessful. However, it has been recently noted that proxy fights waged by hedge funds are successful more than 60% of the time

8. Special Meeting 1 Special Meeting limitations either increase the level of shareholder support required to call a special meeting beyond that specifedby state law or eliminate the ability to call one entirely. Such provisions add extra time to proxy fights, since bidders must wait until the regularly scheduled annual meeting to replace board members or dismantle takeover defenses. This delay is especially potent when combined with limitations on actions by written consent (see below).

9. Written Consent Limitations on action by Written Consent can take the form of the establishment of majority thresholds beyond the level of state law, the requirement of unanimous consent, or the elimination of the right to take action by written consent. Such requirements add extra time to many proxy fights, since bidders must wait until the regularly scheduled annual meeting to replace board members or dismantle takeover defenses. This delay is especially potent when combined with limitations for calling special meetings.

10. Compensation plan Compensation Plans with changes-in-control provisions allow participants in incentive bonus plans to cash out options or accelerate the payout of bonuses if there should be a change in control. The details may be a written part of the compensation agreement, or discretion may be given to the compensation committee. Director indemnifiationContracts are contracts between the company and particular officers and directors indemnifying them from certain legal expenses and judgments resulting from lawsuits pertaining to their conduct. Some firms have both “Indemnification” in their bylaws or charter and these additional indemnification “Contracts.”

11. Cumulative Voting 1 Cumulative Voting allows a shareholder to allocate his total votes in any manner desired, where the total number of votes is the product of the number of shares owned and the number of directors to be elected. By allowing them to concentrate their votes, this practice helps minority shareholders to elect directors. Cumulative Voting and Secret Ballot (see below) are the only two provisions whose presence is coded as an increase in shareholder rights, with an additional point to the Governance Index if the provision is absent. General Definition A cumulative voting election elects the top vote-getters, just as with a simple plurality election. However, voters are allowed to concentrate their full share of votes on fewer candidates than seats—unlike bloc voting, where a voter can only award one vote per candidate, up to the number of candidates as seats. With cumulative voting, voters are permitted to not split their votes and instead concentrate them on a single candidate at full value. In an equal and even cumulative ballot, as in Peoria, an individual vote is fractionally divided evenly among all candidates for whom he or she indicates increases, this can result in the need for computing sums of multiple fractions

12. Cumulative Voting 2 Ballots used for cumulative voting differ both in the ways voters mark their selections and in the degree to which voters are permitted to split their own vote. Possibly the simplest ballot uses the equal and even cumulative voting method, where a voter simply marks preferred candidates, as in bloc voting, and votes are then automatically divided evenly among those preferred candidates. Voters are unable to specify a differing level of support for a more preferred candidate, giving them less flexibility although making it tactically easier to support a slate of candidates. A more common and slightly more complex cumulative ballot uses a points method. Under this system, voters are given an explicit number of points (often referred to as "votes" because in all known governmental elections, the number of points equals the number of seats to be elected) to distribute amongst candidates on a single ballot. Typically, this is done with a voter making a mark for each point beside the desired candidate. A similar method is to have the voter write in the desired number of points next to each candidate. This latter approach is commonly used for corporate elections involving a large number of points on a given ballot, where the voter is given one set of points for each votable share of stock he has in the company. Unless an appropriately programmed electronic voting system is used, however, this write-in ballot type burdens the voter with ensuring that his point allocations add up to his allotted sum.

13. Contracts Director indemnification Contracts are contracts between the company and particular officers and directors indemnifying them from certain legal expenses and judgments resulting from lawsuits pertaining to their conduct. Some firms have both “Indemnification” in their bylaws or charter and these additional indemnification “Contracts.”

14. Golden Parachutes Golden Parachutes are severance agreements that provide cash and noncash compensation to senior executives upon an event such as termination, demotion, or resignation following a change in control. They do not require shareholder approval. While such payments would appear to deter takeovers by increasing their costs, one could argue that these parachutes also ease the passage of mergers through contractual compensation to the managers of the target company [Lambert and Larcker 1985]. While the net impact on managerial entrenchment and shareholder wealth is ambiguous, the more important effect is the clear decrease in shareholder rights. In this case, the “right” is the ability of a controlling shareholder to fire management without incurring an additional cost. Golden Parachutes are highly correlated with all the other takeover defenses. Out of 21 pairwise correlations with the other firm-level provisions, 15 are positive, 10 of these positive correlations are significant, and only one of the negative correlations is significant.

15. Golden Parachutes 2 • A golden parachute is an agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. Sometimes, certain conditions, typically a change in company ownership, must be met, but often the cause of termination is unspecified. These benefits may include severance pay, cash bonuses, stock options, or other benefits. They are designed to reduce perverse incentives — paradoxically (and ironically) they may create them. • Proponents of golden parachutes argue that they provide three main benefits: • Make it easier to hire and retain executives, especially in industries more prone to mergers. • Help an executive to remain objective about the company during the takeover process. • Dissuade takeover attempts by increasing the cost of a takeover, often part of a Poison Pill strategy, although tin parachutes (giving every employee takeover benefits and/or job protection) are generally far more effective in this regard. • Critics have responded to the above by pointing out that: • Dismissal is a risk in any occupation, and executives are already well compensated. • Executives already have a fiduciary responsibility to the company, and should not need additional incentives to stay objective. • Golden parachute costs are a very small percentage of a takeover's costs and do not affect the outcome. • The use of golden parachutes have caused some investors concern since they don't specify that the executive has to perform successfully to any degree.

16. Indemnification Director Indemnification uses the bylaws, charter, or both to indemnify officers and directors from certain legal expenses and judgments resulting from lawsuits pertaining to their con- duct. Some firms have both this “Indemnification” in their bylaws or charter and additional indemnification “Contracts.” The cost of such protection can be used as a market measure of the quality of corporate governance [Core 1997, 2000]. Defence costs A company is allowed to lend money to a director to finance his legal and other costs involved in defending himself against any civil regulatory or criminal proceedings brought against him alleging breach of duty, breach of trust or negligence in relation to the company or any associated company.

17. Liability Limitations on director Liability are charter amendments that limit directors’ personal liability to the extent allowed by state law. They often eliminate personal liability for breaches of the duty of care, but not for breaches of the duty of loyalty or for acts of intentional misconduct or knowing violation of the law. Severance Executive Severance agreements assure high-level executives of their positions or some compensation and are not contingent upon a change in control (unlike Golden or Silver Parachutes).

18. Bylaws & Charter Bylaw and Charter amendment limitations limit share- holders’ ability to amend the governing documents of the corpo- ration. This might take the form of a supermajority vote require- ment for charter or bylaw amendments, total elimination of the ability of shareholders to amend the bylaws, or the ability of directors (beyond the provisions of state law) to amend the bylaws without shareholder approval. Secret Ballot Under a Secret Ballot (also called confidential voting), either an independent third party or employees sworn to secrecy are used to count proxy votes, and the management usually agrees not to look at individual proxy cards. This can help eliminate potential conflicts of interest for fiduciaries voting shares on behalf of others, and can reduce pressure by management on shareholder-employees or shareholder-partners. Cumulative Voting (see above) and Secret Ballots are the only two provisions whose presence is coded as an increase in shareholder rights, with an additional point to the Governance Index if the provision is absent.

19. Severance package • A severance package is pay and benefits an employee receives when they leave employment at a company. In addition to the employee's remaining regular pay, it may include some of the following: • An additional payment based on months of service • Payment for unused vacation time or sick leave. • A payment in lieu of a required notice period. • Medical, dental or life insurance • Retirement (e.g., 401K) benefits • Stock options • Assistance in searching for new work, such as access to employment services or help in producing a résumé. • Severance packages are most typically offered for employees who are laid off or retire. Severance pay was instituted to help protect the newly unemployed. Sometimes, they may be offered for people who resign, regardless of the circumstances; or are fired. Policies for severance packages are often found in a company's employee handbook, and in many countries are subject to strict government regulation. Severance contracts often stipulate that the employee will not sue the employer for wrongful dismissal or attempt to collect on unemployment benefits, and that if the employee does so, then they must return the severance money. Severance agreements are more than just a "thank you" payment from an employer. They could prevent an employee from working for a competitor and waive any right to possibly pursue a legal claim against the former employer. Also, an employee may be giving up the right to seek unemployment compensation. It is important to review a severance agreement carefully and contact an employment attorney to assist with the review. A recent ruling in the Western District of Michigan held that severance pay is not subject to FICA taxes.

20. Supermajority Supermajority requirements for approval of mergers are charter provisions that establish voting requirements for mergers or other business combinations that are higher than the threshold requirements of state law. They are typically 66.7, 75, or 85 percent, and often exceed attendance at the annual meeting. In practice, these provisions are similar to Control-Share Acquisition laws. These laws require a majority of disinterested shareholders to vote on whether a newly qualifying large shareholder has voting rights. They were in place in 25 states by September 1990 and one additional state in 1991. General Definition A supermajority or a qualified majority is a requirement for a proposal to gain a specified level or type of support which exceeds a simple majority (over 50%). In some jurisdictions, for example, parliamentary procedure requires that any action that may alter the rights of the minority has a supermajority requirement (such as a two-thirds majority). Changes to constitutions, especially those with entrenched clauses, commonly require supermajority support in a legislature. A supermajority is absolute if the required percentage or fraction is based on the entire membership rather than on those present and voting.

21. Unequal Voting Unequal Voting rights limit the voting rights of some shareholders and expand those of others. Under time-phased voting, shareholders who have held the stock for a given period of time are given more votes per share than recent purchasers. Another variety is the substantial-shareholder provision, which limits the voting power of shareholders who have exceeded a certain threshold of ownership.

22. Antigreenmail Antigreenmail. Greenmail refers to a transaction between a large shareholder and a company in which the shareholder agrees to sell his stock back to the company, usually at a premium, in exchange for the promise not to seek control of the company for a specified period of time. Antigreenmail provisions prevent such arrangements unless the same repurchase offer is made to all shareholders or approved by a shareholder vote. Such provisions are thought to discourage accumulation of large blocks of stock because one source of exit for the stake is closed, but the net effect on shareholder wealth is unclear [Shleifer and Vishny1986; Eckbo 1990]. Five states have specific Antigreenmail laws, and two other states have “recapture of profits” laws, which enable firms to recapture raiders’ profits earned in the secondary market. We consider recapture of profits laws to be a version of Antigreenmail laws (albeit a stronger one). The presence of firm-level Antigreenmail provisions is positively correlated with 18 out of the other 21 firm-level provisions, is significantly positive in 8 of these cases, and is not significantly negative for any of them. Furthermore, states with Antigreenmail laws tend to pass them in conjunction with laws more clearly designed to prevent take overs [Pinnell 2000]. Since it seems likely that most firms and states perceive Antigreenmail as a takeover “defense,” we treat Antigreenmail like the other defenses and code it as a decrease in shareholder rights.

23. Antigreenmail 2 Greenmail or greenmailing is the practice of purchasing enough shares in a firm to threaten a takeover and thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover. The term is a neologism derived from blackmail and greenback as commentators and journalists saw the practice of said corporate raiders as attempts by well-financed individuals to blackmail a company into handing over money by using the threat of a takeover. Corporate raids aim to generate large amounts of money by hostile takeovers of large, often undervalued or inefficient (i.e. non-profit-maximizing) companies, by either asset stripping and/or replacing management and employees. However, once having secured a large share of a target company, instead of completing the hostile takeover, the greenmailer offers to end the threat to the victim company by selling his share back to it, but at a substantial premium to the fair market stock price. From the viewpoint of the target, the ransom payment may be referred to as a goodbye kiss. The origin of the term as a business metaphor is unclear. A company which agrees to buy back the bidder's stockholding in the target avoids being taken over. In return, the bidder agrees to abandon the takeover attempt and may sign a confidential agreement with the greenmailee, guaranteeing not to resume the maneuver for a period of time. While benefiting the predator, the company and its shareholders lose money. Greenmail also perpetuates the company's existing management and employees, which would have most certainly seen their ranks reduced or eliminated had the hostile takeover successfully gone through.

24. Directors’ duties Directors’ Duties provisions allow directors to consider constituencies other than shareholders when considering a merger. These constituencies may include, for example, employees, host communities, or suppliers. This provision provides boards of directors with a legal basis for rejecting a takeover that would have been beneficial to shareholders. Thirty-one states have Directors’ Duties laws allowing similar expansions of constituencies, but in only two of these states (Indiana and Pennsylvania) are the laws explicit that the claims of shareholders should not be held above those of other stakeholders [Pinnell 2000]. In most jurisdictions, directors owe strict duties of good faith, as well as duties of care and skill, to safeguard the interests of the company and the members. The standard of skill and care that a director owes is usually described as acquiring and maintaining sufficient knowledge and understanding of the company's business to enable him to properly discharge his duties. Directors are also strictly charged to exercise their powers only for a proper purpose. For instance, were a director to issue a large number of new shares, not for the purposes of raising capital but in order to defeat a potential takeover bid, that would be an improper purpose.[25]

25. Directors’ duties 2 Directors have a duty to exercise reasonable skill care and diligence - This right enables the company to seek compensation from its director if it can be proved that he hasn't shown reasonable skill or care which in turn has caused the company to incur a loss. Directors also owe strict duties not to permit any conflict of interest or conflict with their duty to act in the best interests of the company. This rule is so strictly enforced that, even where the conflict of interest or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it. In Aberdeen Ry v. Blaikie (1854) 1 Macq HL 461 Lord Cranworth stated in his judgment that, "A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting or which possibly may conflict, with the interests of those whom he is bound to protect... So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of the contract entered into..." However, in many jurisdictions the members of the company are permitted to ratify transactions which would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle should be capable of being abrogated in the company's constitution.

26. Fair-Price Fair-Price provisions limit the range of prices a bidder can pay in two-tier offers. They typically require a bidder to pay to all shareholders the highest price paid to any during a specified period of time before the commencement of a tender offer, and do not apply if the deal is approved by the board of directors or a supermajority of the target’s shareholders. The goal of this provision is to prevent pressure on the target’s shareholders to tender their shares in the front end of a two-tiered tender offer, and they have the result of making such an acquisition more expensive. Also, 25 states had Fair-Price laws in place in 1990, and two more states passed such laws in 1991. The laws work similarly to the firm-level provisions.

27. Pension parachutes Pension Parachutes prevent an acquirer from using surplus cash in the pension fund of the target to finance an acquisition. Surplus funds are required to remain the property of the pension fund and to be used for plan participants’ benefits. A pension parachute is a form of poison pill that prevents the raiding firm of a hostile takeover from utilizing the pension assets to finance the acquisition. When the target firm is threatened by an acquirer, the pension plan assets are only available to benefit the pension plan participants. In corporate governance, the pension parachute protects the surplus cash in the pension fund of the target from unfriendly acquirers; the funds remain the property of the plan’s participants in the target company. The law firm of Kelley Drye & Warren claims to be the pioneers of the "pension parachute". Their first pension parachute was implemented for Union Carbide, and its design was upheld in Union Carbide’s litigation with GAF.

28. Silver parachutes Silver Parachutes are similar to Golden Parachutes in that they provide severance payments upon a change in corporate control, but differ in that a large number of a firm’s employees are eligible for these benefits(Silver Parachutes do not protect the key decision makers in a merger). A clause in a hiring contract describing a relatively lucrative severance package once an employee leaves a company, especially after a merger or acquisition. Such a package often includes cash and stock options, as well equity in the company. A silver parachute is not normally as large as a golden parachute, but a greater number of employees are eligible for one. These provisions are similar to Golden Parachutes in that they provide severance payments upon a change in corporate control, but unlike Golden Parachutes, a large number of a firm's employees are eligible for these benefits.

29. Antigreenmail laws Five states have specific Antigreenmail laws, and two other states have “recapture of profits” laws, which enable firms to recapture raiders’ profits earned in the secondary market. We consider recapture of profits laws to be a version of Antigreenmail laws (albeit a stronger one). The presence of firm-level Antigreenmail provisions is positively correlated with 18 out of the other 21 firm-level provisions, is significantly positive in 8 of these cases, and is not significantly negative for any of them. Furthermore, states with Antigreenmail laws tend to pass them in conjunction with laws more clearly designed to prevent take-overs [Pinnell 2000]. Since it seems likely that most firms and states perceive Antigreenmail as a takeover “defense,” we treat Antigreenmail like the other defenses and code it as a decrease in shareholder rights.

30. Business Combination laws Business Combination laws impose a moratorium on certain kinds of transactions (e.g., asset sales, mergers) between a large shareholder and the firm, unless the transaction is approved by the Board of Directors. Depending on the State, this moratorium ranges between two and five years after the shareholder’s stake passes a prespecified (minority) threshold. These laws were in place in 25 states in 1990 and two more by 1998. It is the only state takeover law in Delaware, the state of incorpo- ration for about half of our sample. Cash-out laws Control-share Cash-out laws enable shareholders to sell their stakes to a “controlling” shareholder at a price based on the highest price of recently acquired shares. This works something like fair-price provisions (see below) extended to nontakeover situations. These laws were in place in three states by 1990 with no additions during the decade.

31. Directors’ Duties laws Thirty-one states have Directors’ Duties laws allowing similar expansions of constituencies, but in only two of these states (Indiana and Pennsylvania) are the laws explicit that the claims of shareholders should not be held above those of other stakeholders [Pinnell 2000]. We treat firms in these two states as though they had an expanded directors’ duty provision unless the firm has explicitly opted out of coverage under the law. Fair price laws expensive. Also, 25 states had Fair-Price laws in place in 1990, and two more states passed such laws in 1991. The laws work similarly to the firm-level provisions. Control-Share Acquisition laws In practice, these provisions are similar to Control-Share Acquisition laws. These laws require a majority of disinterested shareholders to vote on whether a newly qualifying large share-holder has voting rights. They were in place in 25 states by September 1990 and one additional state in 1991.

32. Poison Pills 1 Poison Pills provide their holders with special rights in the case of a triggering event such as a hostile takeover bid. If a deal is approved by the board of directors, the poison pill can be revoked, but if the deal is not approved and the bidder proceeds, the pill is triggered. Typical poison pills give the holders of the target’s stock other than the bidder the right to purchase stock in the target or the bidder’s company at a steep discount, making the target unattractive or diluting the acquirer’s voting power. Poison pills are a crucial component of the “delay” strategy at the core of modern defensive tactics

33. Poison Pills 2 A shareholder rights plan, colloquially known as a "poison pill", or simply "the pill" is a type of defensive tactic used by a corporation's board or directors against a takeover. In the field of mergers and acquisitions, shareholder rights plans were devised in the early 1980s as a way for directors to prevent takeover bidders from negotiating a price for sale of shares directly with shareholders, and instead forcing the bidder to negotiate with the board. Shareholder rights plans are unlawful without shareholder approval in many jurisdictions such as the United Kingdom, frowned upon in others such as throughout the European Union, and lawful if used "proportionately" in others, including Delaware in the United States. The typical shareholder rights plan involves a scheme whereby shareholders will have the right to buy more shares at a discount if one shareholder buys a certain percentage of the company's shares. The plan could be triggered, for instance, when any one shareholder buys 20% of the company's shares, at which point every shareholder (except the one who possesses 20%) will have the right to buy a new issue of shares at a discount. The plan can be issued by the board as an “option" or a “warrant" attached to existing shares, and only be revoked at the discretion of the board or directors. A shareholder who can reach a 20% threshold will potentially be a takeover bidder. If every other shareholder will be able to buy more shares at a discount, such purchases will dilute the bidder's interest, and the cost of the bid will rise substantially. Knowing that such plan could be called on, the bidder could be disinclined to the takeover of the corporation without the board's approval, and will first negotiate with the board so that the plan is revoked. Shareholder rights plans, or poison pills, are controversial because they hinder an active market for corporate control. Further, giving directors the power to deter takeovers puts directors in a position to enrich themselves, as they may effectively ask to be compensated for the price of consenting to a takeover.