1. Poison Pill Existing shareholders are provided with the opportunity to purchase additional discounted shares; in the case of Conrail, existing shareholders are provided with the right to buy an additional share at a 50% discount to the current market price (for every share owned) should an outsider purchase 10% or more of the firm The poison pill is used to fend off hostile takeovers as it dilutes the acquirer’s shares; in the case of Conrail, the defensive strategy contributes to Norfolk’s decision to submit a hostile offer Since the merger between CSX and Conrail is ‘friendly,’ Conrail decide not to enforce the poison pill process 2.
No-Talk Clause Clause preventing Conrail from soliciting other bids for a six month time period; this clause was agreed between CSX and Conrail, widely criticised by Norfolk The clause enables Conrail to value other offers (if they arise) and cancel their agreement with CSX under several conditions; these conditions are Conrail breaching its shareholder fiduciary duties, or vastly superior offers arising (such that CSX can no longer compete) The no-talk clause contributed to Norfolk’s decision to submit a hostile offer 3. Classified Board Board is made up of directors who serve for different periods of time; this makes it very difficult to control the company within a short time period Conrail use a structure in which 1/3rd of directors are elected each year; this makes it difficult for bidders to attain the support of a majority of directors in their first year 4. Break-Up Fee A form of compensation for the buyer firm paid under the condition that the seller firm withdraws from a deal; this compensation is paid to cover for the time and financial costs incurred during the period prior to the deal Furthermore, the break-up fee defence strategy can detract other firms from bidding; this occurs as any potential future bid should cover the costs of withdrawing from a previous agreement The break-up fee agreed between CSX and Conrail is $300m, equivalent to 3.61% of the total transaction cost; given that the average break-up fee varies between 1% and 3% of the transaction cost, one can assume that the slight excess is due to CSX’s attempt to make Norfolk withdraw from the bidding war 5.
Lock-Up Option A lock-up option is a stock option that provides the opportunity for a company (potentially a White Knight) to acquire previously-unissued shares In the case of Conrail, CSX are offered 15.96m shares at $92.50 per share Following the exercise of the lock-up option, and the completion of the second stage tender offer, CSX will control 53.46m (50.2%) of Conrail’s shares