1. case of Conrail, CSX are offered 15.96m shares

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

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now


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
In the case of Conrail, CSX are offered 15.96m shares at $92.50 per
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