Fair Price Amendment

A provision in the charter of any public company that requires prospective buyers to pay "a fair price" to acquire shares held by the company's investors

Author: Vanshika Nakul
Vanshika Nakul
Vanshika Nakul

My name is Vanshika Nakul, pursuing an MSc in Finance, Investment, and Risk at the University of Kent. I have been graduated with a first-class degree in BSc Accounting and Finance from the University of East London.


A young enthusiastic learner who always wants to gain relevant experience and knowledge from exploring different opportunities and experiences. I am a proactive, extrovert and dedicated person. I am confident with strong opinions and possess interpersonal skills like critical thinking, emotional intelligence, speaking confidently, compassionate being an active listener, self-awareness, and social awareness. I am always open to new opportunities and exploring new experiences that will enhance my growth in a real working environment. By nature, I possess two qualities or characteristics which makes me stand out are big-picture thinker and being calm under pressure.

Reviewed By: Krupa Jatania
Krupa Jatania
Krupa Jatania

President @ Hult VC and Consulting Club | Master’s in International Business, Hult '24 | Impact MBA Scholar & McKinsey Forward '23

Last Updated:March 23, 2024

What is a Fair Price Amendment?

A fair price amendment is a provision in the charter of any public company that requires prospective buyers to pay "a fair price" to acquire shares held by the company's investors.

The fair pricing provision aims to discourage aggressive takeovers at undervalued prices by ensuring that any acquisition offer reflects the fair market value of the company's shares.

According to the clause, bidders must submit a fair market value for each share of stock they wish to purchase.

It prevents minorities' shares from bearing a lower value than the company's major shareholders. The fair price amendment ensures that all shareholders receive the same offer price for their shares during an acquisition, regardless of when they acquired them.

It safeguards investors from two-tier tender offers that discriminate against a subset of stockholders, specifically those who possess a negligible amount of the target company's equity.

Key Takeaways

  • The fair price amendment, rotted in a company's charter, mandates that any acquisition offer must reflect the fair market value of the company's shares. This amendment discourages aggressive takeovers at undervalued prices.
  • It ensures uniformity in the offer price for all shareholders during acquisitions, safeguarding minority shareholders from receiving lower values than major shareholders.
  • Fair market value, often determined by factors like the Price-to-Earnings (P/E) ratio and Enterprise Value to Revenue ratio, helps calculate the "fair price" that prospective acquirers must pay for majority ownership.
  • In two-tier tender offers, where a lower price is offered for subsequent shares, the fair price amendment acts as a barrier, compelling acquirers to pay at least the established fair price.
  • Fair price amendments are often part of broader anti-takeover strategies, protecting companies from unfavorable acquisitions through provisions like the Pac-Man Defense or poison pills.

Understanding Fair Price Amendment

The fair price amendment shields stockholders from this discrimination by ensuring a uniform offer for all shares presented for acquisition.

Practically speaking, the "fair price" is the amount that any prospective acquirer in the market will have to pay to try and buy a majority ownership in the target company. Typically, this sum is determined by the company's book value per share or most recent yearly profits.

The price-to-earnings (P/E) ratio and the enterprise value-to-revenue ratio are important financial ratios frequently used to determine the appropriate pricing. Management usually considers the historical earnings recorded to determine the company's current market price.

The major triggers for this amendment are synergies that will ultimately lead to higher profits and aid in eliminating the existing competition. 

A corporation may attempt to acquire another company in a hostile takeover for various reasons. First, it may capitalize on visible synergies by acquiring a business and utilizing its established production, marketing, and logistical networks.

How the Fair Price Amendment Works

Fair price amendments ensure that shareholders receive a fair price for their shares in the event of a hostile takeover. If the transaction is opposed, the acquirer will likely increase its offer price.

This provision provides exactly that barrier needed to protect the shareholder's welfare. The board can also ensure the buyer pays at least the fair price established under the company's bylaws.

In a two-tier tender offer, the buyer first makes an appealing price offer (e.g., a higher price per share or a higher percentage of cash) for a significant portion of the target company's shares.

The goal of the first tier is to give the purchasing corporation more influence over the target company's decision-making. Then, another offer to buy more shares comes, but this time, at a lower price per share than the first one.

Note

Completing an acquisition using a two-tier structure lowers the purchase's overall cost.

The buyer frequently makes a first-tier tender offer to purchase a certain proportion of the target company's shares for a given price. The tender offer specifies the second-tier tender offer price for the takeover or merger.

Managers are constantly aware that once the takeover offer is completed, the acquirer can remove them from their positions. As a result, provisions like the Fair Price Amendments guarantee that the takeover offer is put off. 

The fair price of the shares set by the acquirer may occasionally be too high in the acquirer's opinion. He might then decide against making the takeover offer. By doing this, the management can thwart the takeover effort and keep its position.

However, a two-tiered tender offer may not always be advantageous for the target company's investors, as it may pressure the company to accept an offer promptly or risk facing a potentially lower one later.

Calculating the Fair Market Value

Fair value is the anticipated price at which an item will be bought or sold if the buyer and seller willingly agree on a price. A widely utilized metric for evaluating the fair market value of a stock is the Price-to-Earnings (P/E) ratio.

This ratio can be calculated by either multiplying the historical earnings reported by the company in focus or examining the average P/E ratio across all publicly traded companies within the same industry sector.

Another approach to pricing stocks is through the Enterprise value-to-revenue ratio.

This metric enables the computation of a fair price for the stock based on a multiple of the company's historical revenues. Additionally, one may assess the price-to-sales ratio of comparable companies within the same industry as the target company.

Anti-takeover measures and Fair Price Amendments

The company's charter specifies the procedure for determining the fair market price bidders should pay, which may include considering factors beyond past stock prices.

If implemented, an Anti-Takeover measure is often related to the provision of fair price amendment. An anti-takeover measure is anything a company does to prevent being acquired by another under unfavorable conditions.

Acquisition firms could want to buy a business by using unfair leverage to help boost its market share, lessen competition, or manage it more profitably. The Pac-Man Defense, the Macaroni Defense, and the poison pill are common anti-takeover techniques.

Note

The P/E ratio is one factor frequently used to determine a stock's fair market value, but other factors may also be considered. 

The price-to-earnings ratio can be calculated by multiplying the target firm's historical earnings by a certain multiple or by examining the average P/E ratio for all the stocks of publicly traded companies in the same industrial sector.

The Enterprise Value to Revenue ratio can be used as an alternative to the P/E ratio when determining the stock price. For example, the stock's fair price can be determined by multiplying it by the company's historical revenues using the EV-to-revenue ratio.

The price-to-sales ratio is a commonly considered metric when evaluating a stock's fair market value. This may involve analyzing companies other than direct competitors in the same sector.

Fair Price Amendment FAQs

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