Lobster Traps: Definition, Implementation, and Strategic Considerations

A lobster trap is a strategic safeguard utilized by small target companies to fend off hostile takeover attempts orchestrated by larger corporations. This defensive mechanism is typically enacted through provisions embedded in the company’s charter, aiming to restrict shareholders with a stake exceeding 10% from converting their securities into voting shares. By impeding significant shareholders from bolstering their voting stock, lobster traps effectively deter attempts at seizing control of the target company.

Hostile takeovers pose significant threats to target firms, prompting the adoption of various defensive tactics. Lobster traps, one such strategy, are implemented through specific provisions within a company’s charter. These provisions enforce rules preventing shareholders holding more than 10% of convertible securities from converting them into voting stock. Convertible securities encompass a range of assets, including bonds, preferred shares, debentures, and warrants.

Consider a hypothetical scenario where Small Pond, a company facing a hostile takeover bid from Big Fish Inc., employs a lobster trap defense. Despite pressure, Small Pond’s management vehemently opposes the takeover and invokes a provision in its charter to prevent a hedge fund holding 15% voting shares from converting its warrants into voting stock. Consequently, Small Pond successfully thwarts the hostile bid, safeguarding its independence.

While lobster traps are effective deterrents against hostile takeovers, alternative defense strategies exist within the corporate landscape:

Poison pills, available in flip-in and flip-over forms, serve to dissuade potential acquirers. The former allows shareholders, excluding the acquirer, to purchase additional shares at a discount, diluting the acquirer’s stake. The latter permits target shareholders to purchase acquiring company shares at a reduced price post-takeover, discouraging hostile attempts.

White knight strategies involve friendly companies intervening to acquire the target and thwart hostile takeovers. By preserving the target’s business integrity, white knights offer an alternative to hostile acquisitions, often providing better terms for shareholders.

Scorched earth tactics entail making the target less appealing to potential acquirers by damaging its corporate landscape. This may involve taking on debt, selling assets, or providing substantial payouts to management. However, it’s considered a last resort due to potential long-term consequences.

Implementing a lobster trap typically involves enacting provisions in a company’s charter, which are legally permissible defensive measures.

Yes, other defense strategies include poison pills, white knight interventions, and scorched earth tactics, each serving to deter hostile takeover attempts.

While lobster traps are typically employed by small target firms, there’s no legal restriction preventing large corporations from implementing similar defensive measures if deemed necessary.