Back-End Plan - Explained
What is a Back End Plan?
Written by Jason Gordon
Updated at March 10th, 2022
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What is a Back-End Plan?
A back-end plan refers to an anti-takeover measure that investors use when trading their existing shares in the market. This strategy allows existing shareholders to exchange their existing securities for either cash or other securities at a value decided upon by the board of directors of the target company. This plan is not an attempt of the target company to takeover existing securities from shareholders, rather, these shareholders are allowed to exchange securities for cash or other securities. A back-end plan is also referred to as an anti-acquisition strategy, a note purchase rights plan or a defense mechanism that companies or shareholders use to prevent hostile takeover.
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How Does a Back-End Plan Work?
Back-end plans were designed as defense mechanisms used by companies to safeguard themselves from takeover bids that are rather hostile or forceful. A back-end plan was created in the 1980s, it entails that a target company give room for existing shareholders to exchange their securities for cash or other securities. A back-end plan is one of the strategies used by target companies to compel acquiring companies to negotiate securities exchanges and price with the board of directors of the target company, rather than buying directly from the existing shareholders. For instance, when an acquiring company acquires beyond the percentage of outstanding shares needed for a takeover target, the trgte company sets a back-end plan or a poison pill in place. This plan offers shareholders the right to exchange their existing common stock for cash or other preferred securities.
Setting a Back-End Price
The board of directors of the target company set a back-end price. They determine the cash value or value of other securities that each common stock or shares held by a shareholder will be exchanged for. Usually, the back-end price is always above the market price but the price must be set in good faith. With this plan, shareholders can trade their existing shares for a cash value or other securities in a way that the acquiring company is unable to impose a lower share price to seal the acquisition process. However, a back-end plan or poison pill is bound to fail if the acquiring company offers a greater price that the back-end price.