Abstract: This paper argues that the law should allow target boards to signal their beliefs against an unsolicited bid to takeover their corporations. Target boards may signal by committing, if the bid fails, to purchase, and hold for a specified time, a certain amount of at-the-bid price target’s stock. Courts that perceive the signal credible should give it a substantial weight when deciding whether to allow boards to use defensive tactics, including a “poison pill”, to fend off hostile takeovers. When courts do not allow defensive tactics, shareholders may still be persuaded by the signal and be authorized to fend off the bid. I construct a game theoretical model to show that the suggested mechanism separates loyal managers from disloyal and credibly transmits valuable private information from boards to courts and shareholders. I further show that the proposed signaling mechanism will improve managerial ex-ante incentives to maximize firm value and to reduce their agency costs. Finally, I suggest a framework for a legal reform in Delaware to implement my suggested mechanism.

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