The Concept of a Lobster Trap and An Example

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The Concept of a Lobster Trap and An Example
Jasleen Kaur, Manager, India

A Lobster Trap is based on the process of acquiring securities from small stock holders and merging them into voting stock so as to prevent rival companies to take over the target firm. The etymology of the phrase comes from the idea that lobsters are difficult to catch because of their size but their large size can make them a great and a profitable catch (ignoring the smaller ones). This strategy can only be used on convertible securities.
Companies need to provision the "Lobster Trap" in their corporate charter beforehand so that they are able to use it when the situation arises. It is one of the many anti-takeover tactics that companies use including: Poison pill, Crown Jewel, Pac-man Defense, White Knight, Golden Parachute and Scorched Earth.
Here's an example of a Lobster Trap. Company ABC Inc has incorporated the lobster trap strategy in their corporate charter. ABC Inc receives a hostile take over offer bid from bigger rival XYZ Inc. ABC is not willing for the takeover to happen. So they try to take shareholder support which should lead to no-takeover. They approach one of the hedge funds they know with more than 10% of their voting shares and prevent the hedge fund from converting into voting shares and therefore reject the hostile bid.

Source: Yang, E. and S. Zarin (2011) Mergers & Acquisitions: Hostile takeovers and defense strategies against them.



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