What is Stockholder Rights Plan?
966 reads · Last updated: December 5, 2024
The shareholder equity plan is a company's anti-takeover measure designed to protect the company from hostile takeovers by potential acquirers. The plan usually includes the issuance of new shares or stock purchase rights, or gives existing shareholders the right of first refusal to purchase new shares. This plan can make potential acquirers face higher costs or make it more difficult to gain control.
Definition
A Shareholder Rights Plan is an anti-takeover strategy used by companies to protect themselves from hostile takeovers by potential acquirers. This plan typically involves issuing new shares or stock purchase rights, or giving existing shareholders the right to purchase new shares preferentially. This can make it more costly or difficult for potential acquirers to gain control.
Origin
The Shareholder Rights Plan originated in the United States in the 1980s, a time when companies faced numerous hostile takeover threats. In 1982, attorney Martin Lipton first proposed this strategy, which later became known as the "poison pill." This strategy was quickly adopted by many companies to protect themselves from unfriendly takeovers.
Categories and Features
Shareholder Rights Plans are mainly divided into two types: triggered and non-triggered. Triggered plans automatically activate when a potential acquirer reaches a certain shareholding threshold, while non-triggered plans require board approval. Features include increasing acquisition costs, diluting the acquirer's shares, and protecting company independence.
Case Studies
In 1985, Revlon successfully used a Shareholder Rights Plan to fend off a hostile takeover, eventually being acquired at a higher price by a friendly bidder. Another example is PeopleSoft in 2004, which implemented a Shareholder Rights Plan to successfully resist Oracle's hostile takeover, ultimately reaching a higher-priced agreement.
Common Issues
Common investor questions include whether a Shareholder Rights Plan harms shareholder interests. Typically, such plans may cause short-term stock price drops, but in the long term, they can protect company value. Another misconception is that all companies need such plans, whereas they are only necessary when facing hostile takeover threats.
