Our hipster brother Rusty is one of those annoying people who always has to be into something before it’s cool (and then promptly loses interest once it becomes “casual”). From obscure underground bands to manbuns to IPOs, if there is something new on the horizon, Rusty is the first to jump right on it. For music and manbuns, this isn’t really a big deal—Rusty can always delete songs from playlists or cut his hair if whatever he’s into becomes too mainstream. But when it comes to IPOs, that isn’t always an option, because penalty bids exist.
“Penalty bids” are provisions attached to the purchase of some IPO stock which say that the purchaser of said stock has to hold onto it for a predetermined amount of time—even if other people start to buy it too, Rusty.
The goal of penalty bids is to keep predatory investors from making short-term IPO profits and then ditching the stock to the detriment of the newly listed company. If Rusty and his broker do decide to sell the shares back early, they’ll face a financial penalty fee. Usually this fee is borne by the broker in the form of reduced commissions, but sometimes it’s passed along to clients.
Related or Semi-related Video
![Finance: What is a Hostile Takeover?](https://media1.shmoop.com/video/thumbnails/COURSE.FINANCE.834_770x433.jpg)
Finance: What is a Hostile Takeover?24 Views
Finance a la shmoop what is a hostile takeover?
alright nose plugs 4 less has been run poorly for a decade it used to be the [Man discussing company with nose plugs]
dominant nose bleed preventer in the industry but after years of you know
leakage the stock has come all the way down from a hundred bucks a share to
twenty dollars today frustrated investors who bought in at a hundred and
then 80 and then 72, 53, 45 and 33 have written
reams of complaint letters to the board who just doesn't seem to listen to what [Man angrily typing complaint on keyboard]
is an obvious fix well they have to fire the CEO and put someone in power who
will you know stop the bleeding but they won't for whatever reason the board is
remaining loyal to the CEO so now these angry shareholders and yes they are
hostile well, they get together and openly try to buy the company under a
process where they buy off as many shares as they can common shares they
team up among themselves yeah and then finally when they have a majority
ownership in the company or at least enough to sway the vote they start [Pie chart appears with hostile shareholders]
electing new board members with their common share votes
you know board members who actually listen to them remember that it's the
common shareholders who elect the board here people then the board hires the CEO
who hires well pretty much everyone else and hostile takeovers still happen these
days or at least get threatened here's one of the juicier ones and arguably one
of the worst wealth destroying deal passes in history when Microsoft tried to
go hostile and by Yahoo in 2008 and the board didn't listen and while they ended [Man with microsoft briefcase for head giving presentation]
up selling for less and so here's kind of the letter yeah you can kind of skim
So went on and on Yahoo past and while bad things [Microsoft merge failure newspaper article appears]
happened so hostile takeovers do they happen to well-run good companies who
were doing well? well generally no they're only bad for poorly run
companies and actually good for the shareholders because hostile takeovers
usually mean the share appreciates in value
and so then the common shareholders who actually own the company well at least
they eventually get paid at least something closer to a fair price so yeah
the best way to avoid a hostile takeover well as always to plug the leak before [CEO plugs in nose plugs]
it you know gets to be a problem
Up Next
A Pac-Man defense is a strategy for defending against a hostile takeover. Or...against unwelcome houseghosts.