Lobster Trap

  

When we hear the term “lobster trap,” maybe we picture some sort of Deadliest Catch scenario involving rough seas and lots of swear words. But in the world of business takeovers, lobster traps have less to do with delicious crustaceans and more to do with corporate voting rights. (Though there might still be swear words.)

In the business world, a “lobster trap” is a strategy designed to prevent hostile takeovers. In a nutshell, the organization’s powers-that-be pass a provision that forbids anyone who owns more than 10% of the company’s stock (or bonds or warrants or other securities) to convert those securities into voting rights. The purpose here is to ensure that sneaky investors aiming to take us over by buying up all of our stock...can’t do it. They can buy the stock if they want to, but it won’t get them the voting power they’d need to actually take control.

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Finance: What is a Hostile Takeover?24 Views

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Finance a la shmoop what is a hostile takeover?

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alright nose plugs 4 less has been run poorly for a decade it used to be the [Man discussing company with nose plugs]

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dominant nose bleed preventer in the industry but after years of you know

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leakage the stock has come all the way down from a hundred bucks a share to

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twenty dollars today frustrated investors who bought in at a hundred and

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then 80 and then 72, 53, 45 and 33 have written

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reams of complaint letters to the board who just doesn't seem to listen to what [Man angrily typing complaint on keyboard]

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is an obvious fix well they have to fire the CEO and put someone in power who

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will you know stop the bleeding but they won't for whatever reason the board is

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remaining loyal to the CEO so now these angry shareholders and yes they are

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hostile well, they get together and openly try to buy the company under a

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process where they buy off as many shares as they can common shares they

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team up among themselves yeah and then finally when they have a majority

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ownership in the company or at least enough to sway the vote they start [Pie chart appears with hostile shareholders]

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electing new board members with their common share votes

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you know board members who actually listen to them remember that it's the

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common shareholders who elect the board here people then the board hires the CEO

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who hires well pretty much everyone else and hostile takeovers still happen these

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days or at least get threatened here's one of the juicier ones and arguably one

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of the worst wealth destroying deal passes in history when Microsoft tried to

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go hostile and by Yahoo in 2008 and the board didn't listen and while they ended [Man with microsoft briefcase for head giving presentation]

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up selling for less and so here's kind of the letter yeah you can kind of skim

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So went on and on Yahoo past and while bad things [Microsoft merge failure newspaper article appears]

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happened so hostile takeovers do they happen to well-run good companies who

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were doing well? well generally no they're only bad for poorly run

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companies and actually good for the shareholders because hostile takeovers

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usually mean the share appreciates in value

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and so then the common shareholders who actually own the company well at least

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they eventually get paid at least something closer to a fair price so yeah

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the best way to avoid a hostile takeover well as always to plug the leak before [CEO plugs in nose plugs]

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it you know gets to be a problem

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Finance: What is a Pac Man Defense?
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A Pac-Man defense is a strategy for defending against a hostile takeover. Or...against unwelcome houseghosts.

Find other enlightening terms in Shmoop Finance Genius Bar(f)