Dead Hand Provision

Unraveling the Enigma of Dead Hand Provisions: A Shield Against Hostile Takeovers

In the realm of corporate finance, the term "dead hand provision" looms large as a formidable defense mechanism against hostile takeovers. But what exactly does it entail, and how does it function? Let's dive into the intricacies of dead hand provisions, exploring their purpose, mechanisms, and controversies surrounding their use.

Deciphering Dead Hand Provisions

Dead hand provisions, also known as dead hand poison pills, are strategic maneuvers employed by target companies to fend off unwelcome advances from potential acquirers. By automatically issuing new shares to existing shareholders once a certain threshold of shares is acquired by the hostile bidder, dead hand provisions effectively dilute the value of the acquirer's stock holdings, making a takeover more financially burdensome.

Understanding the Mechanisms

When faced with a hostile takeover attempt, a company's management may resort to deploying defensive tactics, such as poison pills or golden parachutes, to thwart the acquisition bid. Dead hand provisions operate on the principle of dilution, making it costlier and less appealing for the hostile bidder to pursue control of the target company. These provisions typically trigger when the hostile acquirer accumulates a predetermined percentage of the target company's shares.

Critiquing Dead Hand Provisions

While dead hand provisions serve as a potent deterrent against hostile takeovers, they have attracted criticism for concentrating decision-making power in the hands of the existing board of directors. Unlike traditional poison pills, dead hand provisions restrict the ability of newly elected directors to revoke them, potentially prolonging the tenure of incumbent management even against the wishes of shareholders. This has sparked debates and legal challenges in jurisdictions like Delaware, where courts have invalidated certain aspects of dead hand provisions.