Shareholder rights plan
A shareholder rights plan, colloquially known as a "poison pill", is a type of defensive tactic used by a corporation's board of directors against a takeover.
In the field of mergers and acquisitions, shareholder rights plans were devised in the early 1980s as a way to prevent takeover bids by taking away a shareholder's right to negotiate a price for the sale of shares directly.
Typically, such a plan gives shareholders the right to buy more shares at a discount if one shareholder buys a certain percentage or more of the company's shares.[1] The plan could be triggered, for instance, if any one shareholder buys 20% of the company's shares, at which point every shareholder (except the one who possesses 20%) will have the right to buy a new issue of shares at a discount. If all other shareholders are able to buy more shares at a discount, such purchases would dilute the bidder's interest, and the cost of the bid would rise substantially. Knowing that such a plan could be activated, the bidder could be discouraged from taking over the corporation without the board's approval, and would first negotiate with the board in order to revoke the plan.[2]
The plan can be issued by the board of directors as an "option" or a "warrant" attached to existing shares, and only be revoked at the discretion of the board.
History[edit]
The poison pill was invented by mergers and acquisitions lawyer Martin Lipton of Wachtell, Lipton, Rosen & Katz in 1982, as a response to tender-based hostile takeovers.[3] Poison pills became popular during the early 1980s in response to the wave of takeovers by corporate raiders such as T. Boone Pickens and Carl Icahn. The term "poison pill" derives its original meaning from a poison pill physically carried by various spies throughout history, a pill which was taken by the spies if they were discovered to eliminate the possibility of being interrogated by an enemy.
It was reported in 2001 that since 1997, for every company with a poison pill which successfully resisted a hostile takeover, there were 20 companies with poison pills that accepted takeover offers.[4] The trend since the early 2000s has been for shareholders to vote against poison pill authorization, since poison pills are designed to resist takeovers, whereas from the point of view of a shareholder, takeovers can be financially rewarding.
Some have argued that poison pills are detrimental to shareholder interests because they perpetuate existing management. For instance, Microsoft originally made an unsolicited bid for Yahoo!, but subsequently dropped the bid after Yahoo! CEO Jerry Yang threatened to make the takeover as difficult as possible unless Microsoft raised the price to US$37 per share. One Microsoft executive commented, "They are going to burn the furniture if we go hostile. They are going to destroy the place." Yahoo has had a shareholders rights plan in place since 2001.[5] Analysts suggested that Microsoft's raised offer of $33 per share was already too expensive, and that Yang was not bargaining in good faith, which later led to several shareholder lawsuits and an aborted proxy fight from Carl Icahn.[6][7] Yahoo's stock price plunged after Microsoft withdrew the bid, and Jerry Yang faced a backlash from stockholders that eventually led to his resignation.
Poison pills saw a resurgence of popularity in 2020 as a result of the global coronavirus pandemic. As stock prices plummeted due to the pandemic, various companies turned to shareholder rights plans to defend against opportunistic takeover offers. In March 2020, 10 U.S. companies adopted new poison pills, setting a new record.[8]
The Twitter Board of Directors unanimously enacted a shareholder rights plan in 2022 following an unsolicited purchase offer from Elon Musk.[9][10]