Family Dollar Stores Inc rejected Trian Group's bid to buy the company for at least $7 billion, saying it "substantially undervalues" the retailer.
The company's board said any sale of the company is not in the best interest of shareholders, adding that it has its own plans to open more stores and renovate older ones as it tries to capture more of shoppers' spending on basic goods such as food.
Last month, billionaire investor Nelson Peltz's firm offered to buy Family Dollar for $55 to $60 per share in cash.
Family Dollar adopted a shareholder rights plan that floods the market with shares if any one investor acquires a 10 percent stake. Such plans, often known as "poison pills," increase the cost of taking over a company.
In February, Trian said it owned about 8 percent of Family Dollar shares, making Peltz the company's biggest stockholder.
Trian's offer, announced in a regulatory filing on Feb. 15, represented at least a 25 percent premium to Family Dollar's previous closing price of $43.96 on the New York Stock Exchange.
The shares fell 2.8 percent to $49 in premarket trade on Thursday.
Family Dollar, which sells most of its items for $10 or less, caters to consumers with household incomes of $40,000 and below. Its shares soared nearly 80 percent last year, as it brought in new shoppers who continued to hunt for deals as the economic downturn persisted.
Family Dollar had 126.4 million shares outstanding as of Dec. 27, 2010, implying that Trian's deal had a value of $6.95 billion at $55 per share and $7.6 billion at $60 per share.
A spokeswoman for Trian was not immediately available for comment. Peltz has two other partners in the firm, Peter May and Ed Garden.
Family Dollar Chairman and Chief Executive Howard Levine -- son of the company founder -- had been invited to join as a bidder.
Leon Levine founded Family Dollar in 1959 in Charlotte, North Carolina. He retired in 2003 from the company, which now has more than 6,800 stores in 44 states.
In the past, Peltz has in the past pushed for change at consumer companies ranging from ketchup maker H.J. Heinz Co to fast-food chain Wendy's and luxury jewelry retailer Tiffany & Co.
Morgan Stanley is advising Family Dollar and Cleary Gottlieb Steen & Hamilton LLP is its legal counsel. (Reporting by Jessica Wohl; Editing by Lisa Von Ahn and Derek Caney)