Shareholder rights plans

The target company issues rights to existing shareholders to acquire a large number of new securities, usually common stock or preferred stock. The new rights typically allow holders (other than a bidder) to convert the right into a large number of common shares if anyone acquires more than a set amount of the target's stock (typically 15%). This dilutes the percentage of the target owned by the bidder, and makes it more expensive to acquire control of the target. This form of poison pill is sometimes called a shareholder rights plan because it provides shareholders (other than the bidder) with rights to buy more stock in the event of a control acquisition.[2]

[edit] Effects on shareholders

The goal of a shareholder rights plan is to force a bidder to negotiate with the target's board and not directly with the shareholders. The effects are twofold:[3]

• It gives management time to find competing offers that maximizes selling price.
• Several studies have indicated that companies with poison pill (shareholder rights plans) have received higher takeover premiums than companies without poison pills. This results in increased shareholder value. The theory behind this is that an increase in the negotiating power of the target is reflected in higher acquisition premiums.