Why Is a Shareholder Rights Plan Called a “Poison Pill?”

Confronted with the prospect of a hostile takeover by one other firm or an investor group, a company board would possibly undertake a defensive technique referred to as a shareholder rights plan. Such plans discourage the unwelcome accumulation of firm inventory above a set threshold by promising to dilute an activist purchaser’s stake with discounted share gross sales to the opposite shareholders. The purpose is to make share purchases above the restrict set within the shareholder rights plan unpalatable, therefore the “poison tablet” nickname for the tactic.

An instance of a poison tablet protection occurred in 2012, when the board of Netflix, Inc. (NFLX) adopted a shareholder rights plan days after investor Carl Icahn acquired a ten% stake within the firm. The poison tablet stipulated that within the occasion of any new acquisition of 10% or extra, any Netflix merger or Netflix gross sales or transfers of greater than 50% of belongings, different shareholders would be capable to buy two shares for the value of 1.

Benefits of a Shareholder Rights Plan

Launched in 1982 as hostile takeovers began shaking up company boardrooms, shareholder rights plans have confirmed efficient as a delaying tactic, although they’re seldom the long-term reply to activist strain or merger curiosity.

A poison tablet protection might assist an organization whose share worth has suffered a short-term decline resist a vulture bid from a possible acquirer in search of to benefit from a brief low cost. Market declines on the outset of the COVID-19 pandemic led lots of of U.S. corporations to undertake shareholder rights plans for that cause.

Disadvantages of a Shareholder Rights Plan

By discouraging a motivated purchaser from shopping for extra firm inventory, a shareholder rights plan is more likely to depart a share worth decrease than it might be in any other case, no less than within the quick run.

Poison drugs may protect entrenched and underperforming firm managers from shareholder efforts to exchange them.

The excellent news on that rating is that since shareholder rights plans are adopted by firm boards, changing a board in a proxy contest could make a poison tablet go away if the brand new board so chooses.

As a result of poison drugs discriminate in opposition to activist patrons and restrain buying and selling in an organization’s inventory, they usually require justification, and sometimes have sundown provisions.

Shareholder rights plans can’t dilute the stakes acquired earlier than they had been adopted, to allow them to’t reverse the buildup of shares by activists or potential acquirers.