Hostile M&A Activity Could Spur Comeback of Takeover Defenses

The Bottom Line

• Volatile markets have spurred an explosion in unsolicited and hostile attempts by investors to acquire competitors.
• Poison pills and staggered boards that have fallen out of favor are making a comeback as companies prepare to defend themselves from unsolicited mergers and acquisitions activity.
• In response to traditional defenses returning, activist investors are leveraging new media channels to pressure target companies, requiring businesses to rethink how they will protect themselves.

Unsolicited mergers and acquisitions bids in 2025 have made for eye-popping headlines. In February a consortium of investors led by Elon Musk made an unsolicited $97.4 billion offer to acquire OpenAI. In August, startup Perplexity AI made an unsolicited $34.5 billion bid for Google Chrome. These numbers indicate how robust unsolicited M&A activity is likely to continue, even in volatile markets.

Understanding the Risks

A public acquisition bid places immense pressure on the target company’s board and management. Unsolicited bids typically appear with little notice and require a prompt and cohesive response. Delays or perceived inconsistencies in the board’s response undermine the company’s position. The response to an unsolicited bid can put further stress on a board’s decision-making, as it can generate tremendous uncertainty and unease among the company’s various constituencies.

Beyond introducing immediate time pressure, unsolicited M&A activity comes with other serious consequences. It diverts management resources and attention from core business operations. It also comes with significant costs, including those associated with implementing defense strategies and hiring legal and financial advisers. An unsolicited bid includes a proxy battle that can also harm the company, as it may hurt corporate culture, contribute to the loss of key talent, and alienate customers and business partners.

Preparing for Unsolicited Bids

The need for a quick response to an unsolicited M&A proposal underscores why companies must be prepared, both to avoid becoming the target of a hostile offer and to respond to an offer once made. Because the board is ultimately responsible for evaluating a proposed deal, directors must be aligned on key strategic issues.

Accordingly, directors should regularly monitor strategic plans in light of possible strategic and financial alternatives, such as divestitures, spinoffs, or other types of restructuring transactions. A board should regularly assess potential merger partners and review its company’s portfolio of assets.

When a board is attuned to the arguments for, and likelihood of, alternative transactions, it can assess an unsolicited proposal’s merits with a higher degree of rigor. Decision-making based on thorough analysis is one of a board’s best defenses against unsolicited proposals that prioritize short-term interests.

In building out its defensive toolkit, a company needs to develop a strong investor relations team with a strategy. A company must be able to show its shareholders that its board and management are focused on the company’s performance and stock price. Because goodwill with shareholders goes a long way in the face of an unsolicited bid, the company must also be proactive about investor outreach and engagement.

Companies that develop a preparedness strategy and readiness plan to address unsolicited M&A activity are best positioned to protect their long-term business goals and maximize shareholder value. A sophisticated strategy will find the right balance between permitting a takeover that delivers fair value and holding out against a proposal that conflicts with shareholders’ best interests. Directors should be familiar with specific takeover defense mechanisms that may form the foundation of such a preparedness strategy.

Takeover Defenses

A company’s strongest takeover defense is a tactical shareholder rights plan (commonly known as the “poison pill”). A poison pill acts as a highly effective safeguard against unsolicited bids by making the company a less attractive target to a hostile acquirer.

While their mechanics may vary, poison pills generally entail the issuance of rights to shareholders to purchase additional stock at a steep discount. When an unwelcome acquirer crosses a specified ownership threshold without board approval—often 15%—the poison pill activates, triggering the purchase rights for all holders except the party that exceeded the threshold. This results in significant dilution of the hostile acquirer.

The sheer effectiveness of the poison pill made it a regular part of M&A activity through the mid-2000s, but its potency also contributed to its decline. Because poison pills are such powerful deterrents to unsolicited bids, institutional shareholders and proxy voting advisers have long argued that directors only adopt poison pills to entrench themselves and engage in actions that destroy shareholder value.

The efforts of institutional shareholders and proxy voting advisers have led to a prevailing belief that poison pills are contradictory to shareholders’ best interests and have driven them largely out of fashion. Over the years, boards have recognized they don’t need to have an active poison pill continuously in place to capture its intended benefits. Many companies have shareholder rights plans “on the shelf,” ready for immediate adoption in the face of a specific threat.

The poison pill is a well-established defensive measure in the US. Differences in governance philosophy and regulatory culture, however, have generally kept the poison pill out of the M&A toolkit for companies outside the country. This may change as hostile M&A activity expands its global footprint.

In late December 2024, Japan’s Nidec Corp. launched an unsolicited $1.8 billion tender offer for Tokyo-based Makino Milling Machine Co. The aggressive bid marked an unusual development for Japanese M&A. Corporate laws in Japan generally encourage consensus building with target companies.

Sullivan & Cromwell represented Makino in its response, which culminated in the adoption of a poison pill. Despite seeking a temporary injunction from the Tokyo District Court, Nidec failed to receive judicial relief and withdrew its bid in May. Makino’s successful use of the poison pill signals how M&A and corporate governance are evolving in Japan.

First, it shows that target companies are becoming more assertive against unsolicited activity. Second, it sets a precedent for future takeover attempts in a jurisdiction where poison pills have been rare.

The poison pill’s comeback run in the US and its recent use outside the country necessitate an awareness of its limitations. Contrary to the views of many institutional shareholders and proxy voting advisers, a poison pill doesn’t stop anyone from making an offer for a company—it only keeps hostile tender offers at bay. Depending on the terms of the specific plan, a poison pill may also limit the number of shares that can be issued.

Moreover, while a poison pill that a company keeps “on the shelf” can be adopted quickly, its protections don’t last forever. Due to proxy adviser guidance, companies generally avoid adopting pills that last longer than a year.

A hostile acquirer can also turn to a proxy contest to circumvent a poison pill. In a proxy contest, an acquiring party convinces other shareholders to vote with it to win control of the board or force desired changes in business strategy. Despite its potential limitations, however, the poison pill can effectively stall for time so that a board may more thoroughly assess an unsolicited offer and create more leverage in compelling negotiations between the acquirer and the board.

The staggered board was once seen as one of the strongest shields against unsolicited M&A bids. A company with a staggered board divides its directors into three classes and puts only one class up for election at a given annual meeting. As a result, only one-third of the directors can be replaced in any year, dragging out the time required for a hostile acquirer to seize control of the board while simultaneously giving the board more time to respond to takeover bids. A company with a staggered board can thus prevent sudden changes to its strategic direction.

Although it was historically a primary line of defense against unsolicited bids, only 10% of S&P 500 companies today feature a staggered board, down from 60% in 2006. This precipitous decline is the result of pressure from activist investors who cite the staggered structure as an impediment to effective corporate governance. Such activists criticize the staggered board for encouraging board entrenchment, which they argue discourages responsiveness to shareholders.

Nevertheless, it’s unlikely that the staggered board will disappear anytime soon. Because the staggered structure eliminates the pressure of annual reelections, a board that is staggered can more easily pursue a long-term business strategy, which is ideal for younger companies and those that prioritize innovation or invest heavily in research and development activities. For this reason, the staggered structure will continue to be popular among new entrants to public markets. This is likely to be particularly the case in fields with a robust startup presence, such as technology, generative artificial intelligence, and digital health.

While the poison pill and staggered board are widely recognized as the most effective takeover defenses, companies may consider implementing other safeguards.

Companies may require a supermajority vote to amend certain charter or bylaw provisions, offering cushion against outside attempts to change the governing documents in a manner that facilitates a takeover. Alternatively, they may require advance notice from shareholders who wish to put shareholder proposals forward or nominate directors at shareholder meetings, giving them more time to mobilize a response strategy. Boards should review governance documents regularly to ensure their corporate defenses are aligned with current benchmarks and best governance practices.

Directors should also be creative in identifying new defenses that are better adapted to the current environment. Activists are increasingly coupling traditional media forms with social media—including platforms such as Instagram, Reddit, TikTok, and X—to find support for their messaging.

Last October, Elliott Management added yet another digital weapon to activists’ arsenal by launching a podcast as part of its campaign against Southwest Airlines. Though activists have invested considerable resources into making their campaigns more media-savvy in recent years, “Stronger Southwest” marks the first time the podcast medium has been used to directly influence a company’s shareholder base. Moreover, it swiftly reached a critical mass of shareholders—within just a week of publication, its first episode amassed nearly 3,000 views on YouTube, with more listeners tuning in through Spotify and Apple.

Directors should be aware of novel media forms, which may be particularly effective at influencing retail investors or other smaller, individual investors. Ignoring these digital channels may create significant blind spots, while monitoring them allows for proactive engagement and a more robust defense strategy.

What to Expect Ahead

Significant unsolicited M&A activity will likely continue in the coming years, given market and policy uncertainty. Consequently, once-popular takeover defenses may see renewed use, especially as boards step up their efforts to protect falling stock prices and deliver long-term value.

Companies will also adjust their defense strategies to account for new trends in the activist space. The increasingly aggressive tactics that activists and other acquirers are adopting suggest unsolicited and hostile activity will remain an important component of the M&A landscape. A strong preparedness and response strategy will be crucial in such an environment.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Frank Aquila is partner at Sullivan & Cromwell who has advised deals totaling more than $1 trillion in value.

Catherine Yuh is an associate at Sullivan & Cromwell.

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