CFA Level II Exam · Corporate Restructuring

Takeover Defenses and Regulation for CFA Level II

Updated 7 October 2026 · Fact-checked

Takeover defenses are actions a target takes to stop or shape an unwanted bid. Pre-offer defenses are typically put in place before a bid arrives, such as poison pills. Post-offer defenses respond to a live bid, such as white knights or greenmail. Regulators such as antitrust authorities can block or condition deals.

Understand Takeover Defenses and Regulation

A friendly deal is negotiated with the target's board and usually recommended to shareholders. A hostile deal bypasses or opposes the board. The bidder goes straight to shareholders with a tender offer, or runs a proxy fight to replace directors who resist.

Targets defend for two reasons. Management may want to protect its own jobs, which is an agency problem. Or the board may honestly believe the bid undervalues the company and want a better price. On the exam, read which motive the vignette supports.

The curriculum groups defenses by when they are typically put in place. The split follows the standard categories and the mechanism. It is not an absolute rule. A defense that is normally pre-offer, such as a poison pill, would be a post-offer action if the board adopted it as a response after a bid appeared.

Pre-offer defenses are typically put in place before any bid. The main ones are:
- Poison pill (flip-in): existing shareholders, except the bidder, can buy shares at a deep discount once a bidder crosses an ownership trigger. This dilutes the bidder.
- Poison pill (flip-over): target shareholders can buy the acquirer's shares at a discount after the merger.
- Poison put: bondholders can demand early repayment if control changes.
- Staggered board: only part of the board is elected each year, so control takes longer to win.
- Supermajority voting, fair price provisions and restricted voting rights raise the bar for approval.

Post-offer defenses respond once a bid is made. The main ones are:
- Greenmail: the target repurchases the bidder's stake at a premium, and the bidder agrees to drop the bid.
- White knight: a friendly firm makes a competing, more acceptable bid.
- White squire: a friendly party buys a large block without taking full control.
- Pac-Man defense: the target bids for the acquirer.
- Crown jewel defense: sell the most attractive assets so the target is less appealing.
- Leveraged recapitalization: take on heavy debt to pay a big dividend or buy back shares.
- Litigation, or a just say no stance.

Regulation limits both sides. Antitrust authorities review deals for harm to competition. They can approve, require remedies such as asset sales, or block the deal. Tests often use market concentration measures such as the Herfindahl-Hirschman Index. Securities regulators set disclosure, filing and fairness rules. Many regimes require a bidder who crosses an ownership threshold to disclose it. Under SEBI's takeover regulations in India, crossing a stated ownership threshold or acquiring control triggers a mandatory open offer to public shareholders. Treat this as a general pattern and take the details from the vignette.

Key formulas to remember

Pre-offer vs post-offer test: Typically in place before a bid arrives → pre-offer; adopted or used in response to a live bid → post-offer; Poison pills, poison puts, staggered boards and supermajority rules are standard pre-offer defenses. Greenmail, white knight, Pac-Man, crown jewel and leveraged recapitalization are post-offer. If the vignette says a normally pre-offer tool was adopted only after a bid appeared, treat that action as post-offer.
Flip-in poison pill effect: Bidder's percentage ownership falls as other holders buy new shares at a discount; The bidder is excluded from the discounted purchase. This dilutes the bidder's stake and raises its cost.
Herfindahl-Hirschman Index (HHI): HHI = Σ (market share in % )² across all firms; A merger raises HHI by 2 × share of firm A × share of firm B. A larger rise in a concentrated market draws more antitrust scrutiny.

How to solve Takeover Defenses and Regulation questions

Use this sequence for any defense or regulation question in an item set.

1Find out whether the deal is friendly or hostile and whether a bid has already been made.
2Underline the defensive action in the vignette and note who does what (target, bidder, third party).
3Classify it as pre-offer or post-offer by asking whether it is typically in place before a bid arrives, then name the tactic from its mechanism. Check when the vignette says it was adopted.
4Ask who gains and who loses: target shareholders, management, bidder, bondholders.
5If regulation appears, decide whether the issue is competition (antitrust) or disclosure and fairness (securities rules, open offer).
6For HHI, compute the change as 2 × share A × share B and compare with the vignette's threshold.
7Check the answer against the vignette facts, not your general memory.

Quickest way: Timing and mechanism shortcut

When to use it: When the question asks you to name or classify a defense.

Ask: is this defense typically put in place before a bid arrives? Yes means pre-offer. If it is a response to a live bid, it is post-offer.
Match the mechanism: dilution means poison pill, friendly rival means white knight, buying back the bidder's stake means greenmail.
Check the beneficiary. If only management gains, suspect an agency problem.
Eliminate options that mix up the timing.

Common mistakes in Takeover Defenses and Regulation

Classifying a poison pill as a post-offer defense.
It is triggered by a bid, so it feels like a reaction.
Fix: The curriculum lists poison pills as pre-offer defenses because they are typically adopted beforehand and triggered later. Only a pill the vignette says was adopted in response to a live bid would be a post-offer action.
Confusing a white knight with a white squire.
Both are friendly outsiders.
Fix: A white knight bids to acquire the target. A white squire buys a large stake without taking control.
Thinking greenmail helps all shareholders.
It ends the bid, which looks like protection.
Fix: The bidder is paid a premium that other shareholders do not receive, so it is usually harmful to them.
Mixing up flip-in and flip-over pills.
The names sound alike.
Fix: Flip-in lets target holders buy target shares cheaply. Flip-over lets them buy the acquirer's shares cheaply after the merger.
Adding market shares instead of using the HHI formula for the change.
Students assume the combined share is all that matters.
Fix: Remember the HHI increase is 2 × share A × share B, with shares in percent.

Worked examples

Example 1

Vignette: Corvane Ltd. adopted a rights plan two years ago. Under it, if any holder acquires 20% or more of Corvane's shares, all other holders may buy additional Corvane shares at half the market price. Drexel Inc. has now bought 21% and announced a hostile bid. (1) Classify the defense. (2) What happens to Drexel's stake? (3) Is the defense pre-offer or post-offer?

Show the solution

The plan lets target shareholders buy target shares at a discount once a trigger is crossed. This is a flip-in poison pill.
Drexel is excluded from the discounted purchase. Other holders buy new shares, so the total share count rises.
Drexel's 21% is therefore diluted below 21%, and acquiring control becomes much more expensive.
The plan was adopted two years ago, before any bid existed, and poison pills are a standard pre-offer defense.

Answer: (1) Flip-in poison pill. (2) Drexel's ownership is diluted. (3) Pre-offer defense.

Example 2

Vignette: Two firms in a sector that also has other competitors plan to merge. Firm A has a 30% market share and Firm B has 10%. The regulator says it will examine any deal that raises the HHI by more than 100 points. (1) Compute the HHI increase. (2) Will the regulator examine the deal under its rule? (3) Name one remedy the regulator might require.

Show the solution

Change in HHI = 2 × 30 × 10 = 600.
600 is greater than the 100-point threshold.
Regulators who clear deals with conditions often require divestiture of overlapping assets.

Answer: (1) 600 points. (2) Yes, 600 exceeds 100. (3) Divestiture of overlapping business units or assets.

Exam tips

Start by deciding whether a bid has been made and when the defense was adopted. Timing and standard category separate the two defense groups.
Learn the one-line mechanism of every defense. Vignettes describe the action and rarely use the name.
Expect questions on who benefits, since agency conflict is a favorite angle.
For HHI, keep shares in percent and use the 2 × A × B shortcut for the change.
Use the thresholds stated in the vignette for regulation. Do not rely on memorized local rules.

Takeover Defenses and Regulation: frequently asked questions

What is the difference between a hostile and a friendly takeover?

A friendly takeover has the support of the target's board. A hostile takeover is opposed by the board, so the bidder goes directly to shareholders through a tender offer or a proxy fight.

What is a poison pill in simple terms?

It is a pre-offer defense that makes a takeover very costly. When a bidder crosses an ownership trigger, other shareholders can buy shares cheaply, which dilutes the bidder.

Is a white knight the same as greenmail?

No. A white knight is a friendly firm that makes a better bid for the target. Greenmail is the target buying back a bidder's stake at a premium so the bidder goes away.

What is an open offer under SEBI takeover rules?

It is an offer made to public shareholders to buy shares, triggered when an acquirer crosses specified ownership thresholds or takes control. For CFA Level II, know the general idea and rely on the vignette for any details.