Shareholder rights plan

A shareholder rights plan, colloquially known as a "poison pill", or simply "the pill" is a kind 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 by advocate for directors' interests, Martin Lipton, as a way for directors to prevent takeover bidder negotiating a price for sale of shares with shareholders, and instead forcing the bidder to negotiate with the board. Shareholder rights plans are unlawful without shareholder approval in many jurisdictions such as the United Kingdom, frowned upon in others such as throughout the European Union, and lawful if used "proportionately" in others including Delaware in the United States.

The typical shareholder rights plan involves a scheme whereby shareholders will have the right to buy more shares at a discount, if one shareholder buys a certain percentage of the company's shares. The plan could be triggered, for instance, when any one shareholder buys up 20% of the company's capital, at which point every other shareholder (except the one who already possesses 20%) will have the right to buy a new issue of shares at a discount. The plan is issued by the board as an "option" or a "warrant" attached to existing shares, and can only be revoked at the discretion of the board of directors. The point is that the shareholder who could potentially reach the 20% threshold will be a takeover bidder. If every other shareholder will be able to buy more shares at a discount, that will mean the bidder's interest will be diluted, and the cost of the bid will rise substantially. If the bidder knows that this will happen, the bidder will not attempt to take the corporation over without the board's approval. They will negotiate with the board so that the plan is revoked.

Shareholder rights plans, or poison pills, are controversial because they hinder an active market for corporate control. During the 1980s, a merger and acquisition boom in the US and UK was largely thought to be highly detrimental to company performance, and had deleterious effects on a company's workforce and ethos. However, giving discretion to directors to prevent takeovers puts directors in a powerful position to enrich themselves as the price for consenting to a takeover.