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 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, and widely criticised by Norfolk The clause enables Conrail to consider other offers (if they arise) and cancel their agreement with CSX under several conditions; these conditions are Conrail breaching its own shareholder fiduciary obligations, 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 In the case of Conrail, 1/3rd of directors are elected each year; this makes it difficult for bidders to attain the support of a majority of directors over a short time horizon 4. Break-Up Fee A form of compensation for the buyer firm (i.e.
CSX) paid under the condition that the seller firm (i.e. Conrail) withdraws from a deal; this compensation is paid to account for the time and financial costs incurred during the period prior to the deal Furthermore, the break-up fee defence strategy can detract other buyers from bidding; this occurs as any potential future bid needs to cover the costs of withdrawing from a previous takeover agreement The break-up fee agreed between CSX and Conrail is $300m, equivalent to 3.61% of total transaction cost (slightly greater than average to detract Norfolk) 5. Lock-Up Option A stock option that provides the opportunity for a company (potentially a White Knight) to acquire previously-unissued shares (typically 10-20%); in the case of Conrail, CSX are offered 15.96m shares 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