Back-End Plan

A back-end plan is an anti-acquisition strategy in which the target company provides existing shareholders, with the exception of the company attempting the takeover, with the ability to exchange existing securities for cash or other securities valued at a price determined by the company’s board of directors. A back-end plan, also known as a note purchase rights plan, is a type of poison pill defense. Poison pill defenses are used by companies to prevent a hostile takeover by an outside company.

Back-end plans were developed in the 1980s as a defense against two-tiered takeover bids, in which the acquiring company would pay a high price for shares until it held a majority of shares. The company would then use the voting rights connected with those shares to force the remaining shareholders to accept a lower price in order to complete the merger.

Companies fending off a takeover bid may utilize several different techniques designed to make the acquisition so costly and difficult that the acquiring company either gives up or is forced to negotiate with the company board rather than purchasing shares from existing shareholders. These anti-acquisition strategies are often referred to as poison pills, and include back-end plans.

A back-end plan is put into motion when a company attempting a takeover bid acquires more than a specific percentage of outstanding shares of a takeover target. It is a type of put plan, as shareholders have the right to exchange common stock for cash, debt securities or preferred stock, with preferred stock being the most typical security issued in connection with a back-end plan. If an outside company acquires a large block of shares – such as 20% — shareholders who hold the preferred stock would be able to acquire super voting rights.

The back-end price is usually set above the market price, but must be set at a price that is considered to have been made in good faith. By providing shareholders with the right to obtain shares with a higher value if the acquiring company reached a majority stake, the acquiring company would not be able to force a lower share price to complete the acquisition. If the acquiring company offers a price greater than the price specified in the back-end plan, the poison pill will fail.