The purpose of a shareholder rights plan is to force an acquirer to negotiate with the target

company’s board of directors. Typically, if any person or group acquires a certain percentage

(usually between 10-25 percent) of the voting power of the company’s outstanding common

stock, stockholders of the company (other than the acquiring person) have the right to buy

common stock at a substantial discount (often at 50 percent of the market price). This results

in substantial dilution of the acquiring person’s investment in the company and would likely

thwart the takeover bid. The target company’s board of directors can vote to amend or

terminate the shareholder rights plan. This gives the target company’s board substantial

leverage in negotiating on behalf of its stockholders for a purchase price more in line with

the true value of the company.