Shareholder Rights Agreement
(Poison Pill) (DE)

Summary

This template shareholder rights plan, commonly referred to as "poison pills," contemplates Delaware as the governing law. Since poison pills are governed by state law, any differences between Delaware law and the law of a different state governing a rights plan should always be determined when reviewing or preparing a rights plan. This template includes practical guidance, drafting notes, and optional clauses. Shareholder rights plans are a takeover defense for a board of directors to use against hostile takeovers. Although, numerous studies have shown that poison pills do not prevent hostile takeovers, especially if the acquirer is persistent, shareholders of companies with poison pills typically do receive higher premiums in acquisitions than shareholders of companies without poison pills. Poison pills are designed to, among other things, promote shareholder value by encouraging bidders to negotiate with the board and offer better initial terms and avoid coercive tactics, as well as to provide the board with time to respond to bids in a deliberative manner and explore alternatives to the proposed transaction. Poison pills generally provide that if any person acquires a specified percentage of a company's stock, the company will grant to its shareholders (other than the acquirer) the right to buy shares of the company's stock at a discount (e.g., 50%) (known as a "flip-in" provision). Also, the company typically grants to its shareholders (other than the acquirer) the right to buy shares of the acquiring company's stock at a discount (e.g., 50%) if it merges with the company (known as a "flip-over" provision). The poison pill, by enabling the company's shareholders (other than the acquirer) to purchase shares at a discount (or in some circumstances exchange rights for shares), dilutes an acquirer's interest in the company. In the rights plans, the board has the ability to redeem or otherwise revoke the rights (effectively eliminating the effect of the poison pill) in the event that the board approves an acquirer's offer. As a result, rights plans discourage acquirers from initiating a hostile takeover unless the board approves the acquirer's offer and revokes the poison pill. Poison pills have been in existence since the 1980s. They have evolved over time as some older provisions like the "dead hand" (a provision providing that only continuing directors have the right to redeem, amend or terminate the plan), "slow hand" (a provision providing that the plan may not be redeemed, amended or terminated for a specified period of time, typically 180 days) or "no hand" (a provision providing that the plan may not be redeemed, amended or terminated) have been invalidated by Delaware and other state courts while other provisions have been adopted in recent years to address the changes in the landscape of hostile and other acquisitions. Also, there have been periods when many companies adopted plans followed by periods in which a number of companies have abandoned their plans in response to adverse views of them by shareholder advisory groups. In light of the changing landscape of rights plans, the following poison pill provisions should be reviewed: (i) ownership percentage triggers (factoring in ownership of derivatives, swaps and other synthetic equity positions and addressing groups of shareholders acting in concert (also known as "wolf-packs")), (ii) duration, (iii) the use of "qualifying offers," (iv) the use of a trust to facilitate an exchange of rights after a person becomes an "acquiring person" and (v) redemption provisions. In addition, the template below includes relevant provisions for an "NOL Rights Plan", a rights plan designed to preserve certain tax benefits of a company's net operating losses. For further discussion of poison pills and other takeover defenses, see Hostile Takeover Defense Strategies, Poison Pills: Fiduciary, Filing, and Disclosure Obligations, NOL Rights Plans, Rights Plans: Current Developments in the Application of Derivative Arrangements and Parallel Action by Share Accumulators, and Shelf Rights Plans and Other Strategies to Enhance the Defensibility of Rights Plans. For a broad collection of content related to hostile takeovers and shareholder activism, see Hostile Takeovers & Shareholder Activism Resource Kit.