White Knight
A white knight is a friendly acquirer invited by the board of a company facing a hostile takeover to submit a competing bid, offering the target's shareholders and management a preferred alternative to the hostile transaction and potentially blocking the unwanted acquirer from completing its offer.
When a company becomes the target of an unsolicited or hostile acquisition attempt, its board has a range of defensive tools available. The white knight strategy involves actively searching for an alternative acquirer — one acceptable to the board and, ideally, to shareholders — whose bid can displace the hostile offer. The white knight may be willing to preserve the existing management team, maintain the company's headquarters location, or agree to other conditions that the hostile bidder would not accept.
From a shareholder's perspective, a white knight defense can produce two outcomes. If the white knight competes with the hostile bidder in an auction for control, the bidding competition may drive the ultimate acquisition price higher, benefiting shareholders. Alternatively, if the white knight and hostile bidder do not engage in a true auction and the white knight pays a price close to the hostile offer, shareholders may receive no incremental benefit relative to accepting the hostile bid directly.
Delaware corporate law imposes significant constraints on how boards can manage a change-of-control transaction once one is triggered. Under the Revlon doctrine — arising from the Delaware Supreme Court's 1986 decision in Revlon, Inc. v. MacAndrews & Forbes Holdings — when the sale of the company becomes inevitable, the board's duty shifts from preserving the corporate entity to maximizing value for shareholders. In this context, a board that selects a white knight at a lower price than a hostile bidder can face fiduciary duty claims from shareholders arguing that the board prioritized management entrenchment over shareholder value.
In practice, the white knight strategy is often used in combination with other defenses: the company may simultaneously adopt or rely on an existing poison pill, engage a financial adviser to conduct an expedited sales process, and negotiate deal protections with the white knight — such as a termination fee or matching rights — that make it harder for the hostile bidder to displace the negotiated transaction.
A variation on the white knight is the white squire, in which a friendly investor acquires a significant but non-controlling stake in the target, providing enough dilution or voting power to complicate the hostile bidder's ability to acquire control without a full acquisition of the company.