Stockholder rights plan: Overview, definition, and example
What are stockholder rights plans?
A stockholder rights plan, also known as a "poison pill," is a strategy used by companies to protect themselves from hostile takeovers. The plan gives existing shareholders the right to purchase additional shares at a discount or take other actions that make the acquisition more expensive or difficult if a potential acquirer buys a certain percentage of the company’s shares. The goal is to make the company less attractive to hostile bidders and maintain control within the current management or shareholder base.
Why are stockholder rights plans important?
Stockholder rights plans are important because they provide a defense mechanism against hostile takeovers, which could result in unwanted changes in company management, structure, or strategy. These plans help protect the interests of existing shareholders and management by making it more difficult or costly for an outside party to gain control of the company. They can also help prevent an acquirer from gaining too much influence in a short period, ensuring that the company has time to assess any takeover offers properly.
Understanding stockholder rights plans through an example
For example, imagine a company’s board of directors notices that an outside investor is purchasing a large percentage of shares in the company, potentially leading to a hostile takeover. To protect the company, the board activates the stockholder rights plan, allowing other shareholders to buy additional shares at a discounted price. This dilutes the value of the shares the acquirer already owns, making the takeover more expensive and less appealing.
In another example, a company might issue new shares to existing shareholders as part of a stockholder rights plan, thereby giving them the opportunity to maintain their ownership percentage and avoid being "squeezed out" by an acquirer. If the acquirer attempts to purchase shares without the approval of the company, the stockholder rights plan can make it significantly more difficult to complete the takeover.
An example of a stockholder rights plan clause
Here’s how a clause related to a stockholder rights plan might appear in a corporate governance document:
“In the event that any person or group acquires 15% or more of the Company’s outstanding shares, all stockholders, excluding the acquirer, will have the right to purchase additional shares at a significant discount, diluting the acquirer’s holdings and making it more difficult to complete the acquisition without board approval.”
Conclusion
Stockholder rights plans are critical tools for protecting companies from hostile takeovers and ensuring that management and existing shareholders maintain control. By implementing such plans, companies can guard against rapid changes that may not align with the best interests of the business or its stakeholders. These plans provide a way to ensure that any potential takeover is evaluated thoroughly and with adequate consideration of all shareholders' interests.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.