Law Quadrangle (formerly Law Quad Notes)


Adapted with permission from the article, "Defensive Stock Repurchases," Harvard Law Review, Volume 99, by Michael Bradley, Associate Professor of Finance, University of Michigan, Graduate School of Business Administration, and Michael Rosenzweig, Associate Professor of Law, University of Michigan Law School (which articel is hereinafter referred to a as Bradley & Rosenzweig). For the most part, documentation is not provided in this adaption, as full citations may be found in the aforementioned article.

Target companies employ a variety of defensive tactics in an effort to thwart hostile bidders. In recent years, targets have resorted with increasing frequency to repurchases of their own stock to defeat hostile tender offers. This tactic may serve several strategic purposes. First, such repurchases may increase the percentage of the target's stock that is owned by management or management loyalists who are unlikely to tender, thereby enhancing the probability that the bid will fail. Second, a repurchase may raise the price of the target's stock above the tender offer price, forcing the bidder to confront the unwelcome dilemma of having to increase its offer or abandon the fight. Third, the repurchased stock may come from the bidder itself, which may agree as a condition of the sale to terminate its effort to win control of the target.