Quick facts
- What it is: a friendly bidder recruited to outbid a hostile one
- Why it works: shareholders choose the better offer
- The catch: it is still a sale of the company
- Governing duty: once a sale is inevitable, get the best price
- Judicial anchor: Revlon v. MacAndrews & Forbes (Del. 1986)
A white knight is an acquirer a target board prefers, brought in to compete with a hostile bidder it does not. The board cannot refuse to be bought indefinitely, so it finds a buyer on better terms and lets shareholders choose.
The defence works. It is worth being clear about what it achieves: the company is still sold. Only the buyer changes.
In plain English
A board facing an unwanted offer has limited options. It can resist, and Delaware recognises that where a bid is inadequate and coercive a board has "both the power and duty to oppose a bid it perceived to be harmful to the corporate enterprise."3 But resistance only delays. It can try to improve the offer, which requires the bidder to cooperate. Or it can find someone else willing to pay more.
The third option is the only one that reliably ends the situation, because it gives shareholders something better rather than asking them to accept less.
The case that defines it
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. is the canonical white knight case. Revlon faced a hostile bid from MacAndrews & Forbes and turned to Forstmann Little as a friendlier alternative.
The Delaware Supreme Court explained why a target may need to offer something to attract such a bidder. Options granted to a favoured bidder "can entice other bidders to enter a contest for control of the corporation, creating an auction for the company and maximizing shareholder profit," and a "white knight like Forstmann might only enter the bidding for the target company if it receives some form of compensation to cover the risks and costs involved."1
That is the legitimate case for inducements. A rescuer arriving late, against an established bidder, is taking real risk.
Where Revlon's board went wrong
The court also drew the line. "Lock-ups and related agreements are permitted under Delaware law where their adoption is untainted by director interest or other breaches of fiduciary duty. The actions taken by the Revlon directors, however, did not meet this standard."1
The problem was the purpose. The board's arrangement with Forstmann was aimed partly at protecting noteholders whose securities had fallen in value, and who were threatening litigation. Directors have some latitude to weigh other constituencies while defending against a threat, but by this stage the situation had changed.
The court's description of that change is the most quoted sentence in the case: the directors' role "changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company."1
Once a sale is inevitable, preferring one bidder for reasons unrelated to price stops being defence and starts being a breach.
What this means in practice
A board may recruit a white knight. It may negotiate. It may even grant deal protections. What it may not do is use the white knight to stop an auction it is obliged to run.
The practical test is whether the inducement encourages competing bids or forecloses them. Compensation for a genuine risk is defensible. A structure that makes any higher bid impossible is the opposite of getting the best price.
Buying the time to find one
A white knight is not usually available on the day a hostile offer lands. Finding one, running diligence and negotiating terms takes weeks.
That is what the other defences are for. A poison pill prevents the hostile bidder from accumulating shares in the meantime, and a tender offer must stay open for at least 20 business days by rule. In Air Products & Chemicals, Inc. v. Airgas, Inc., the Delaware Court of Chancery observed that the structure, combined with a staggered board, had given the board over a full year to make its case on value.2
Defences do not defeat bidders. They buy the time in which alternatives can be found.
Related terms in the same family
- A black knight is the hostile bidder.
- A grey knight is a third party whose intentions are unclear, often unwelcome to both sides.
These are commentary labels rather than legal categories. No statute knows what a white knight is.
What this means for a founder
Private companies get approached, and the approach is rarely hostile in the public sense. But the underlying dynamic is identical: an offer arrives, and the question is whether it is the best one available or simply the first.
The transferable practice is the part boards get wrong under pressure. Do not run a sale process for the first time when a bidder is already at the table. Know who the plausible acquirers are, and be on speaking terms with two or three of them, before you need any of them.
A single bidder sets the price. Two bidders discover it.
Related reading
- Poison Pill covers the defence that buys time for the search
- Crown Jewel Defense covers the lock-up structures Revlon limits
- Tender Offer covers the mechanism both bidders use
- Fiduciary Duty covers the auctioneer obligation in full