"Just Say No" Defense

What Is a "Just Say No" Defense?

A "just say no" defense is a strategy employed by boards of directors to discourage hostile takeovers by simply refusing to negotiate and rejecting outright whatever the prospective buyer might offer.

The legality of a "just say no" defense may depend on whether the target company has a long-term strategy it is pursuing, which can include a merger with a firm other than the one making the takeover bid, or if the takeover bid undervalues the company.

Understanding a "Just Say No" Defense

The origins of the "just say no" defense can be traced to the 1980s, when raiders with deep pockets bought undervalued companies, dismembering them for a quick profit. This prompted defenseless companies to come up with strategies to thwart corporate raiders.

The "just say no" defense was named after the anti-drug campaign promoted by former First Lady Nancy Reagan. The defense left it up to the board to decide whether to accept or reject a bid, regardless of how much was being offered. Reasons could include anything from fear of job security to a general dislike of the acquirer.

An early use of the term occurred in 1990, when NCR Corp. rejected AT&T's initial $90-per-share tender offer. NCR Chair Charles Exley said the board's stance was to "just say no" to the telephone giant.

The target company's board could deal with an unwanted bid by refusing to negotiate and waive potential defense strategies such as a poison pill. This stance may be taken to render a takeover impossible. Alternatively, it might be pursued to extract a better offer, either from the same bidder or, better yet, from a friendly white knight. 

Example of a "Just Say No" Defense

The case of Paramount Communications vs. Time helped establish the "just say no" defense as a viable anti-takeover strategy. Time was close to merging with Warner Communications, but then received a bid from Paramount that its board rejected because the publishing company had already negotiated a long-term plan with Warner. In July 1989, the case was heard in the Court of Chancery in Wilmington, Del.

The Delaware courts had established precedents for corporate board actions during mergers and acquisitions in two previous cases. The Delaware Supreme Court ruled in the 1985 case involving Unocal, that directors defending their company from a raider may respond only in a reasonable way. Meanwhile, in the 1986 Revlon case, the court ruled that if the board decides to sell a company, it must accept the highest bid and not show any favoritism.

Fortunately for Time, the judge supported its board as the corporation's fiduciaries in this matter, even if shareholders might well have preferred to accept Paramount's bid, adding that corporate law does not compel directors to follow the wishes of the majority of the shares. To support the decision for the Time-Warner merger, the judge wrote: "Directors, not shareholders, are charged with the duty to manage the firm." On appeal, the Delaware Supreme Court upheld the decision unanimously.

Criticism of a “Just Say No” Defense

A "just say no" defense isn't necessarily in the best interest of shareholders since board members can employ it even if an offer is made at a significant premium to the current share price.

Adding to this frustration is a number of stories of companies using this tactic to hold firm and rebuff offers that, in retrospect, they would have better off accepting. One example is Yahoo, which engaged in a "just say no" battle to fight off a $44.6 billion bid from Microsoft (MSFT) in 2008 and then ended up selling off its core business several years later for $4.83 billion.

Special Considerations

There is a significant risk that a "just say no" defense won't be accepted by the courts. If the price offered looks fair and shareholders support it, the board's option to "just say no" may not be viable.

Still, that doesn't mean that directors won't give it a go. Yes, failure is possible. But so, too, is the prospect of securing the company's freedom or, failing that, at least squeezing out a better price for the business.