Effectiveness of defense measures against a hostile take-over generally requires their implementation prior to a hostile bid.

The main and also most effective defensive measures to prevent a hostile bidder from successfully taking over a corporation must be implemented prior to a hostile bid and are subject to approval by the shareholders' meeting. The most effective measures are: (1) Restriction on transfer of registered shares providing the company with the right to refuse registration of a shareholder if his shareholdings exceed a certain percentage specified in the articles (usually between one and five percent of the total share capital). (2) Issuance of registered shares with voting privilege (the par value of preferred voting shares must amount to at least a tenth of the par value of common shares). (3) Restriction on exercise of voting rights, i.e. limitation of the number of votes a single shareholder may cast directly or indirectly, e.g. by proxy or otherwise. (4) Requirement of a certain quorum for the amendment of important provisions of the articles. (5) Authorization of the board to increase the capital stock, to suspend the shareholders' preemptive rights and to offer such newly issued shares to a third party in case of a hostile take-over.

There are other defensive measures which need not be set forth in the articles such as: (1) Sale of crown jewels and/or acquisition of new business divisions in case of a hostile take-over bid ("lock-up agreements"). With the enactment of the Law on stock exchange and securities' trading ("SESA") presumably as per January 1, 1997, such transactions will have to be approved by a shareholders' meeting if such transactions are resolved following the announcement of the hostile bid. Prior to the enactment of the SESA such a transaction can only be considered lawful if it is primarily intended to maximize the purchase price (cf. Holvis). (2) Golden parachutes: Indemnities payable upon a successful hostile take-over may only be granted by the board/management if they comply with their duty to carefully administer the company's assets and safeguard its interests. (3) Poison-put: Provisions in the company's financial indentures setting forth that certain of its debts become immediately repayable upon a successful hostile take-over are generally considered lawful. (4) Poison-pills: Although not explicitly prohibited by Law the permissibility of poison-pills is questionable.

If no such defensive measures have been implemented after a hostile take-over bid is announced, the board may, besides searching for a white knight or launching a MBO, only try to properly communicate its (negative) view on the raider and/or the bid to the shareholders and/or to get certain shareholders organized in a voting pool. Provided that the company possesses the necessary funds and such transaction lies within the statutory purpose of the company, the board may also launch a counter attack ("pac man defense").

The content of this article is intended to provide general information on the subject matter. It is therefore not a substitute for specialist advice.