Shareholder rights plan: Overview, definition, and example
What is a shareholder rights plan?
A shareholder rights plan, commonly known as a "poison pill," is a corporate strategy designed to protect a company from hostile takeovers. This plan gives existing shareholders the right to purchase additional shares at a discounted price if an acquiring party purchases a certain percentage of the company’s stock. By diluting the potential acquirer's ownership stake, the plan makes a hostile takeover more difficult and costly.
For example, a company might trigger a shareholder rights plan if a single investor acquires more than 20% of its shares without board approval.
Why is a shareholder rights plan important?
A shareholder rights plan is important because it safeguards a company’s control and strategic direction by preventing hostile acquirers from gaining majority ownership without the consent of the board or other shareholders. For SMBs, especially those with valuable assets or intellectual property, this plan ensures that any acquisition attempts are conducted transparently and fairly, with the company retaining negotiating leverage.
By including a shareholder rights plan, businesses can protect their value, encourage fair negotiation processes, and deter potential acquirers from acting unilaterally.
Understanding a shareholder rights plan through an example
Imagine a publicly traded tech company is at risk of being taken over by a competitor. To defend against the takeover, the board implements a shareholder rights plan. Under the plan, if the competitor acquires more than 25% of the company’s shares, all other shareholders are granted the right to buy additional shares at a steep discount. This dilutes the competitor’s ownership and makes the takeover significantly more expensive.
In another scenario, a family-owned SMB with external investors establishes a shareholder rights plan in its corporate charter. If an outside investor acquires more than a specified percentage of shares, the plan allows existing shareholders to purchase additional shares, preserving the family’s controlling interest.
An example of a shareholder rights plan clause
Here’s how a shareholder rights plan clause might appear in corporate bylaws or a governance document:
“In the event that any Person or Group acquires beneficial ownership of [Insert Percentage]% or more of the outstanding Common Stock of the Company without prior approval from the Board of Directors, the Board may authorize the issuance of Rights to existing Shareholders, allowing them to purchase additional shares at a discount. The purpose of this Plan is to protect the interests of the Company and its Shareholders by preventing hostile takeovers and ensuring fair negotiation processes.”
Conclusion
A shareholder rights plan is a vital defense mechanism for companies seeking to protect their strategic autonomy and prevent hostile takeovers. For SMBs and larger corporations, this plan deters aggressive acquisition attempts, encourages fair negotiations, and preserves shareholder value. A well-drafted shareholder rights plan outlines clear conditions and mechanisms, ensuring transparency and fostering trust among shareholders.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.