Shareholder Rights Plans


Summary

Shareholder rights plans (commonly known as “poison pills”) were developed in the 1980s to defend against hostile takeovers, and they remain one of the most critical takeover defenses that a company can use against an unsolicited bidder. Under a typical rights plan, if a prospective bidder acquires a certain percentage of the company's stock (usually 10-20%) without board approval, the other shareholders will be entitled to purchase additional shares of the company's common stock for a fraction of the market price, thereby substantially diluting the would-be acquirer's position in the target. Although a poison pill cannot prevent a takeover if the bidder is very motivated, studies have shown that companies with poison pills typically receive higher premiums in an acquisition than those without them. Poison pills give the board time to evaluate alternatives to an unsolicited bid and leverage to negotiate with the bidder, thereby ensuring maximum shareholder value.