Is the White Knight Strategy Still Viable? Conditions for Deploying It as a Takeover Defense

The white knight strategy remains a viable option today, but it only works for companies that have already lined up multiple friendly capital-alliance candidates before a bid ever arrives — companies that start searching once a takeover is underway are almost never in time. What separates success from failure is not the sophistication of the tactic itself, but how much groundwork was done in peacetime.

What Is a White Knight?

A white knight is a third party — typically an operating company or a financial institution — that a target company's management judges to be friendly, and that acquires or subscribes for shares in a way that relatively reduces the acquirer's stake, thereby helping the target preserve its independence in the face of a hostile takeover bid. It is typically executed through a third-party share allotment, a share exchange, or a competing tender offer. This differs in character from a gratis allotment of share subscription rights (the so-called poison pill), which is designed to dilute the acquirer by allotting rights to all existing shareholders; a white knight, by contrast, brings in a specific third party as a new shareholder.

Under What Conditions Does a White Knight Strategy Work?

The conditions for success fall into three broad categories. First, the acceptance period for a tender offer (TOB) is capped by law under Japan's Financial Instruments and Exchange Act, leaving the target only a narrow window to consider its options and negotiate. Starting from zero — sourcing a capital partner, completing due diligence, negotiating terms, and reaching a board resolution — all within the offer period is, in practice, extremely difficult. Second, a response built around a third-party share allotment is subject to the "primary purpose rule": Japanese courts have taken the position that they will enjoin a share issuance if its primary purpose is found to be entrenching incumbent management, and having a business relationship with the allottee that predates the crisis strengthens the case that the allotment is commercially rational. Third, the allottee itself needs both the financial capacity to fund the subscription and a strategic reason to keep holding the target's shares — such as securing raw-material supply, sales channels, or an extension of a broader capital and business alliance. A party that agrees to hold shares merely as a favor is unlikely to become a stable long-term shareholder.

Comparing Cases Where It Worked and Where It Didn't

In 2006, Oji Paper launched a tender offer for Hokuetsu Paper Mills. In response, Hokuetsu carried out a third-party share allotment to Mitsubishi Corporation, and Mitsubishi's subscription as a white knight undermined Oji Paper's prospects of securing the stake it was targeting, causing Oji Paper's tender offer to fail. This is a case in which a friendly capital partner subscribed for new shares, and the target preserved its independence against the acquirer's intentions.

By contrast, in the Bull-Dog Sauce case (2007), Bull-Dog Sauce responded to a tender offer from Steel Partners (at JPY 1,584 per share) by obtaining a special resolution at its general meeting of shareholders (with roughly 83.4% of voting rights in favor) and carrying out a gratis allotment of share subscription rights. The company allotted three subscription rights per share, excluded Steel Partners and its affiliates as ineligible holders, and instead paid them JPY 396 per right (equivalent to one-quarter of the tender offer price) in cash. On August 7, 2007, the Supreme Court of Japan held this defense measure to be lawful (source: Wikipedia, "ブルドックソース事件" [Bull-Dog Sauce case], https://ja.wikipedia.org/wiki/ブルドックソース事件). While the defense itself succeeded, the method differed from Hokuetsu's case: rather than a white knight, it was a poison pill allotted to all existing shareholders.

Comparing the two, in Hokuetsu's case — where the white knight strategy worked — a counterparty willing and able to subscribe already existed beforehand. Bull-Dog Sauce, unable to secure a comparable partner on short notice, instead chose a different path to legitimacy: a shareholder resolution. (This comparison is the editorial team's analysis based on each case's public record, not a direct confirmation of either company's internal decision-making.) The question is not which method is superior, but which option was realistically available at the moment the crisis hit.

Why Should Companies Build a Candidate List in Peacetime?

As noted above, the tender offer acceptance period has a statutory cap, which severely limits the time available for capital-alliance negotiations begun only after a bid arrives. In addition, a third-party share allotment faces the judicial hurdle of the primary purpose rule, and an existing business relationship built in peacetime is what helps a company clear that hurdle. Companies that want to keep the white knight strategy available as an option therefore need to build relationships — before any crisis arrives — with multiple parties for whom a business or capital alliance is realistically achievable. There is no need to narrow the list down to a single candidate; maintaining relationships in parallel with several companies that differ in industry position and financial capacity widens the range of options available when a crisis actually occurs.

What Information-Management Precautions Apply When Searching for a White Knight?

When approaching capital-alliance candidates as a situation approaches crisis, attention to insider trading regulations is essential. If a company discloses undisclosed material facts about itself (the content of a takeover proposal, the status of defensive measures under consideration, and so on) and then approaches a counterparty about acquiring shares, officers or employees of that counterparty who come to possess that material information and then trade the company's shares could be found to have violated the insider trading provisions of the Financial Instruments and Exchange Act. In practice, companies need to manage information carefully — disclosing only what is necessary, at the minimum scope and timing required, entering into non-disclosure agreements, and using wall-crossing procedures that limit the individuals involved. Because the candidate list itself is also an undisclosed matter under consideration, access to it should be restricted internally, and an information-management framework should be put in place from the peacetime relationship-building stage onward.

How Does a White Knight Compare with Other Takeover Defenses?

Besides a white knight, defenses against a hostile takeover include a gratis allotment of share subscription rights (poison pill), issuing a golden share, and divesting a key business (the crown-jewel defense). A poison pill, as in the Bull-Dog Sauce case, tends to gain legitimacy more easily by going through a shareholder resolution, but because it is allotted to all existing shareholders, its dilutive effect is broad. A golden share is designed to give a specific shareholder veto rights, but at a listed company this has a significant effect on the existing voting-rights structure and tends to draw negative assessments from institutional investors and proxy advisory firms. A crown-jewel defense undermines the very attractiveness of the target to an acquirer — it can be effective as a defense, but it risks damaging the company's underlying value. Compared with these, a white knight strategy is easier to justify on business grounds, since it preserves independence by bringing in a new stable shareholder rather than by taking a defensive measure that harms the company or its existing shareholders. Its biggest difference from other defenses, however, is that it requires the lead time to build relationships in peacetime.

FAQ

Q1. What insider trading precautions apply when searching for a white knight?

If a company discloses its own undisclosed material facts and then approaches a candidate about acquiring shares, officers or employees of that candidate could run afoul of insider trading regulations. Companies need to narrow the scope and timing of disclosure and manage information rigorously through non-disclosure agreements and wall-crossing procedures before proceeding with discussions.

Q2. How is the price set when a white knight subscribes for shares?

For a subscription through a third-party share allotment, if the issue price is judged to be "specially favorable," a special resolution at the general meeting of shareholders is required. In practice, pricing is generally based on the recent market price, and setting a price that deviates significantly from the market price heightens the risk on both the accountability owed to existing shareholders and judicial review.

Q3. Doesn't a white knight strategy harm minority shareholders' interests?

Because a third-party share allotment dilutes existing shareholders' stakes, Japanese courts have taken the position that they will enjoin the allotment if its primary purpose is found to be preserving management's control (the primary purpose rule). Whether the company can demonstrate that the alliance is grounded in a genuine, peacetime business relationship is what determines whether it aligns with minority shareholders' interests.

Summary

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