What is a shareholder rights plan?
A shareholder rights plan, also known as a “poison pill”, is a corporate law mechanism used by public companies in the state of New York to guard against hostile takeovers. It is a contractual agreement between a company’s current shareholders and the new potential buyer. The plan is designed to make it prohibitively expensive for a bidder to acquire a large portion of the company’s shares, thereby preventing a hostile takeover. A typical shareholder rights plan works by allowing existing shareholders to purchase additional shares at a discounted price if a new investor purchases a certain threshold of shares. This is often referred to as a “flip-in” provision. For example, if an investor buys 30% of the company’s shares, all of the existing shareholders may purchase additional shares at a discount, thus diluting the value of the new shares and making it more difficult for the bidder to complete the takeover. In addition, the plan may also include a “flip-over” provision, which allows existing shareholders to “flip” their shares over to the bidder in exchange for a predetermined sum of money. This works to dilute the bidder’s interest in the company, making it difficult for them to acquire a majority of the company’s shares. Overall, a shareholder rights plan serves to protect a company’s share value and keep it in the hands of its current shareholders. This helps to prevent hostile takeovers and keep the company out of the hands of hostile investors.
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