Disgorgement Provisions

Discussion

Disgorgement provisions require that an acquirer or potential acquirer of more than a certain percentage of a company's stock pay back, or disgorge to the company any profits realized from the sale of that company's stock purchased before achieving control status. All sales of company stock by the acquirer occurring within a certain period of time (between 18 months and 24 months) prior to the investor's gaining control status are subject to these recapture-of-profits provisions. Ohio and Pennsylvania are the only states that currently have disgorgement provisions.

Impact of Disgorgement Provisions

Disgorgement provisions prevent a hostile acquirer from profiting by purchasing a large stake in a company, announcing a battle for control of that company, and then selling out at the higher market price resulting from news of the potential acquisition. To the extent that this provision protects shareholders from profiteers desiring to put the company in play solely to reap the benefits of a temporarily higher stock price, disgorgement provisions protect shareholder wealth.

However, these provisions are not without an antitakeover effect, in that they eliminate a source of revenue for legitimate acquirers. Often, acquirers may rely on the possibility of selling shares to cover their costs, especially if the bid is unsuccessful. Increasing the risk of substantial losses through the adoption of disgorgement provisions may discourage beneficial takeover attempts. Because disgorgement provisions may provide benefits to shareholders in certain cases, evaluate proposals to opt out of such provisions on a case-by-case basis.