Back-End Plan

What Is a 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. The key characteristic of a hostile takeover is that the target company's management does not want the deal to go through.

How a Back-End Plan Works

Back-end plans were developed in the 1980s as a defense against two-tiered takeover bids. In a two-tiered takeover bid, 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 — preferred stock is 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.