Chastity Bond Definition

What is Chastity Bond?

A chastity bond is a corporation bond that matures, at par, when brought about by means of an match, paying homage to a antagonistic takeover, that raises the cost of the acquisition to the acquirer.

Working out Chastity Bond

A chastity bond is one in all fairly a large number of measures intended to prevent the antagonistic takeover of a company. This type of bond matures right away upon the overall contact of a purpose match paying homage to a takeover or a metamorphosis in keep watch over of the issuer. The period of time perhaps comes from the fact that its serve as is to prevent unwarranted attention from unwelcome corporate suitors.

Chastity bonds are corporate bonds intended to dissuade antagonistic takeovers, consistent with the concept that if a large issue of the ones bonds mature and grow to be payable upon finishing touch of a takeover, the entire gain price would most likely grow to be prohibitively dear to the acquirer. 

This anti-takeover measure is conceptually similar to some other method known as the Macaroni Coverage, in which a large issue of bonds must be redeemed upon a takeover or business of keep watch over, thereby expanding (like macaroni) the purchase price that the acquirer must pay. The only difference is that chastity bonds mature at par, whilst bonds issued in a Macaroni Coverage are redeemable at a substantial best elegance.

Chastity bonds act in a similar fashion to other ways meant to block a takeover as they inflate the value of the target company, making a deal costlier for the acquirer. Similar strategies involving now not atypical stock of the target company include poison pills, shareholder rights plans which enable present shareholders to shop for additional shares of the target company at a bargain, making the deal costlier, or additional shares of acquiring company at a bargain, diluting the value of the mixed company after a completed acquisition. 

Risks of a Chastity Bond Coverage

Chastity bonds are most often issued by means of a centered company when a imaginable acquirer makes public their gain intentions. The ones bonds can be an effective deterrent if the antagonistic bid is made at the most efficient offer price of a imaginable acquirer. However, if the initial bid is indubitably underneath what the acquiring company is finally ready to pay, the additional deal worth from the chastity bonds may not make a difference.  

While increasing the debt duties of a company would most likely deter a antagonistic takeover bid, must or not it’s triumphant the process would saddle the prevailing company with additional debt. Paradoxically, the addition of liabilities to the stability sheet might, over the long term, make a company additional prone to a long term antagonistic acquisition as in its weakened state it is going to lack the financial energy to stick independent.