Gain Capital adopts ‘poison pill’ defense against FXCM hostile takeover

The Gain Capital ( board puts in place a controversial “Shareholder Rights Plan”.

Well this certainly didn’t take long — and should confirm to our readers what we wrote yesterday, namely that FXCM-Gain Capital friendly discussions had been going on behind the scenes for quite some time between FXCM and Gain Capital management, before breaking down, leading to FXCM’s unsolicited offer to acquire Gain Capital made through a ‘bear hug’ letter to Gain’s board.

Gain Capital was clearly ready and prepared for FXCM’s bid to buy the company. In a very quick move, Gain Capital has announced that it has put in place a Shareholder Rights Plan, to ward off any takeover of the company not agreed to by the board.

How does a Shareholder Rights Plan work? Well first, the Gain Capital Board (right now) issues rights to all existing shareholders to buy more Gain Capital stock at a deep discount to the current share price. But those rights only become exercisable if an outsider (namely, FXCM) actually succeeds in acquiring more than 15% of Gain Capital’s shares. If FXCM does indeed acquire 15% or more of Gain’s shares then the plan would automatically kick into place — existing (pre-FXCM) shareholders would then be able to exercise their rights to buy more Gain Capital stock (and lots of it) at a heavily discounted price. As only the existing shareholders — and not the hostile acquirer, namely FXCM — have these rights, it makes it prohibitively expensive for FXCM to try and buy the company, without the consent of the board.

Defenses such as these Shareholder Rights Plans are known in the M&A industry as ‘Poison Pills’. And they are very controversial (and even disallowed in some places, including the UK), because they take decision power away from the shareholders, giving all the power to make decisions to the Board of Directors — only the Board can revoke the rights. And as such they’re almost never actually triggered, but rather used by Boards as a negotiating tactic to improve an acquirer’s bid for a company. Gain’s board can now say to FXCM “You want to buy the company? Well you’ll need to pay what we want. Even if you succeed in getting a lot of shareholders to agree to your current offer you’re not going to be able to buy the company without our consent…”

As we stated yesterday, hostile bids are called that for a reason, and this can (and likely will) get very ugly before it is all over.

For those of you inclined to look up more information on Poison Pills and Shareholder Rights Plans, some interesting reading can be found here:

Stay tuned to LeapRate as this story unfolds…

For a copy of the initial FXCM bear hug letter to Gain Capital’s board click here.

For more on M&A in the Forex sector, including a list of transactions dating back to 2006, and M&A valuation multiples over time, see the LeapRate-Dow Jones Forex Industry Report.


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