Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Exclusion Order ====== An Exclusion Order (also known as an 'Exclusionary Tender Offer') is a corporate finance maneuver where a company makes an offer to buy back its own shares from the public, but with a major catch: it deliberately //excludes// a specific, often large, shareholder from participating. Imagine a company throwing a party and handing out cash gifts to all its owners, but pointedly leaving one person off the guest list. This tactic is one of the most aggressive plays in the corporate defense playbook, typically used to fend off a [[hostile takeover]] or to put immense pressure on a troublesome [[activist investor]]. By offering to buy shares at a premium from everyone //but// the unwanted party, the company's management hopes to rally the support of other shareholders and isolate the excluded entity, making their strategic goals much harder to achieve. ===== The Mechanics of an Exclusion Order ===== So, how does this corporate drama unfold? The process is a special type of [[tender offer]], which is a public offer to purchase some or all of the shareholders' stock in a corporation. * **The Offer:** A company's board of directors announces a "self-tender" offer to repurchase a specific number of its shares, usually at a price significantly above the current market price. This premium is the bait to entice shareholders to sell. * **The Exclusion:** The key feature is the "exclusion clause." The offer documents will explicitly state that a particular shareholder or group of shareholders (for instance, "any person owning more than 10% of the company's stock") is ineligible to tender their shares. * **The Squeeze:** The excluded shareholder is left in a tough spot. They are denied the chance to cash out at a premium price along with everyone else. Meanwhile, if the offer is successful, the total number of shares outstanding shrinks, which can alter the company's ownership structure and financial ratios, not always to the excluded party's benefit. This move effectively isolates the unwanted shareholder, sending a clear and hostile message from the company's management. ===== Why Would a Company Do This? A Corporate Drama ===== An exclusion order isn't a friendly gesture; it's a declaration of war. It was a particularly famous tactic during the "corporate raider" era of the 1980s, serving as a powerful [[shark repellent]]. - **Fending Off a Hostile Bid:** If a corporate raider is accumulating shares to take control of the company, management can launch an exclusion order. This allows them to use the company's own cash to buy out other shareholders, consolidating the ownership among a friendlier base and making the raider's quest for a majority stake more difficult and expensive. - **Dealing with an Activist:** It can also be a tool to combat a vocal activist investor. If an activist is pushing for strategic changes the board opposes—like selling off a division or taking on debt for a huge dividend—an exclusion order can deny them a profitable exit and signal that the board will fight their proposals tooth and nail. The most famous real-world example is the 1985 case of [[Unocal Corp. v. Mesa Petroleum Co.]], where Unocal used an exclusionary self-tender to defend against a takeover bid from T. Boone Pickens' Mesa Petroleum. The court's decision in favor of Unocal set a major precedent in U.S. corporate law regarding defensive measures. ===== The Value Investor's Angle ===== For a value investor, an exclusion order is a giant, flashing neon sign that signals a major conflict at the highest levels of a company. While fascinating, it's also a cause for serious diligence. ==== Is It Still Legal? ==== This is the crucial modern-day context. Following the Unocal case, the U.S. [[SEC]] (Securities and Exchange Commission) stepped in. It enacted the [[All-Holders Rule]] (found in [[Rule 13e-4(f)(8)(i)]] and [[Rule 14d-10(a)(1)]]), which mandates that tender offers must be open to //all// shareholders of the same class of stock on an equal basis. This effectively outlawed the classic exclusion order in the United States for publicly traded companies. ==== Lessons for Today ==== Even though the tactic is now largely historical in its classic form, the underlying principle remains relevant. Value investors should always be on the lookout for signs of governance battles. * **Analyze the Conflict:** Whenever a company engages in complex share buybacks or strategic moves that seem to target specific shareholders, ask why. Is management trying to protect the company's long-term value from a short-term-focused raider? Or are they simply trying to protect their own jobs and salaries, a practice known as [[entrenchment]]? * **Focus on Governance:** The presence of such extreme conflict can be a symptom of a weak board, a misaligned management team, or a deeply undervalued company that has attracted aggressive outsiders. A value investor's job is to cut through the noise of the battle and determine if there is underlying, long-term value in the business worth fighting for.