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Often called a shareholder rights plan, it is meant to frustrate creeping acquisitions of control, in which the acquirer seeks to accumulate a controlling or dominant stake piecemeal without negotiating with the board or offering the same deal to every shareholder.
Common shareholders are granted six rights: voting power, ownership, the right to transfer ownership, a claim to dividends, the right to inspect corporate documents, and the right to sue for wrongful acts. Investors should thoroughly research the corporate governance policies of the companies they invest in.
Yes, poison pills strategies allow shareholders to enjoy immediate profits when they purchase new stock at a discount. However, poison pills result in diluted stock values, so if shareholders want to maintain proportionate ownership in the company, they must buy additional stock to keep up.
A poison pill is designed to discourage a major acquisition of shares and a company's hostile takeover by an individual or entity. Once activated, the strategy allows shareholders, with the exception of the acquiring party, to buy additional shares of company stock at a highly discounted price.
What is a shareholder rights plan? Shareholder rights plans, also known as poison pills, are a takeover defense tool often used to prevent the escalation of a hostile/unsolicited offer by keeping an investor from accumulating a large ownership stake.
The three basic shareholder rights are: the right to vote, the right to receive dividends, and the right to the corporation's remaining assets upon dissolution or winding-up. Where a corporation only has one class of shares, the three basic rights must attach to that class.
For example, if a company had nine directors, then three directors would be up for re-election each year, with a three-year term. This would present a potential acquirer with the position of having a hostile board for at least a year after the first election.
Other Examples of Poison Pills Upon learning that Icahn had acquired a 10% stake in the company, Netflix immediately went on the defensive. Any attempt to buy a large equity position in Netflix without board approval would result in flooding the market with new shares, making any stake attempt very expensive.