In the business sector, hostile takeovers are prevalent. They happen when one business seeks to take over another without the target company’s board of directors’ express approval or consent (B of D). In these situations, the potential acquirer may pursue a number of options, including making an offer or purchasing the target’s available shares to obtain control.
Target companies might use a variety of strategies to protect themselves against these unwanted offers. The lobster trap is one of them.
In order to set a lobster trap, a company’s charter must include a section describing the strategy’s parameters. When a prospective hostile takeover target decides to deploy a lobster trap as a defence, it follows a clause in its charter that precludes certain shareholders—those who own more than 10% of converting securities—from converting their shares into voting stock.