A white squire is an individual or company that buys a large enough stake in the target company to prevent that company from being taken over by a black knight. In other words, a white squire purchases enough shares in a target company to prevent a hostile takeover.
To fully understand the concept and role of a white squire, consider the following example:
1. Company A receives a bid offer from Company B.
In finance, Company A would be called the “Target Company” and Company B would be called the “Acquiring Company.”
2. Company A rejects the offer from Company B.
3. Despite the rejection of their offer, Company B proceeds with a tender offer (attempting to purchase large amounts of shares of Company A by offering a premium price, above the market price) to acquire a controlling interest in Company A.
By continuing to pursue an acquisition despite getting their offer declined by Company A, Company B is engaged in attempting a hostile takeover.
4. An investor friendly to Company A sees the hostile takeover attempt by Company B and decides to step in and help Company A. The friendly investor purchases shares in Company A to prevent the shares from being acquired by Company B.
The friendly investor is a white squire because they are purchasing shares that would’ve been snatched up by Company B. Thanks largely to the interference by the white squire, the acquirer will find it more difficult to buy enough shares to obtain a majority stake in Company A.
Incentives for the White Squire
A white squire is used to help the target company prevent a hostile takeover. The target company must incentivize the white squire to stand on its side of the target and not end up selling its shares to the black knight (thus aiding the hostile takeover attempt).
The possible incentives that may be offered to the white squire include the following:
Before buying a block of shares, the friendly investor typically agrees in advance to vote with the target company and to not sell their shares to the hostile bidder.
White Squire vs. White Knight
A white squire and a white knight are similar in that both are involved in preventing a hostile takeover. However, the differentiating point is that a white knight purchases a majority interest while a white squire purchases only a partial interest in the target company.
White squires are preferred over white knights. The actions of a white knight effectively constitute a friendly takeover, while the squire defense allows the company to retain its current ownership and independence.
Other Defenses to Prevent a Hostile Takeover
There are several other defenses that can be deployed to prevent a hostile takeover. Examples of other hostile takeover defenses include:
Golden Parachute: A contract for executives guaranteeing expensive benefits if they are removed from the company following a takeover
Pac-Man Defense: The target company acquiring shares of the acquiring company.
Supermajority Amendment: An amendment to the company’s charter to require a very large percentage of shareholders (up to 90%) to approve major decisions. This means that the acquiring company would have to possess much more than 50% of the outstanding shares to obtain a controlling interest.
Show-stopper: The target company starting litigation to prevent a takeover attempt
Thank you for reading CFI’s guide to a hostile takeover defense. CFI is the official global provider of the Financial Modeling and Valuation Analyst (FMVA)™ designation, a leading financial analyst certification program. To continue advancing your career, these additional CFI resources will be helpful: