What Does Shareholders' Rights Plan Mean?
A shareholders' rights plan is a defensive strategy adopted by an organization to keep hostile takeovers at bay. In this strategy, the organization gives its shareholders the right to purchase more shares at a discount with an aim to dilute the ownership interest of the organization that is planning a hostile takeover. This strategy is used mainly when one shareholder gets a certain percentage of ownership that is larger than the other shareholders'.
Divestopedia Explains Shareholders' Rights Plan
A shareholders' rights plan, also called a poison pill, can be effectively used to prevent a hostile takeover. When the management team of a newly purchased company believes that the buyer lacks industrial expertise or insight to run the operation, they may take this poison pill to protect the interests of the company and its stakeholders.
One big advantage of this plan is its high success rate in fighting a takeover. Another advantage of this strategy is that it can be customized effectively to meet the needs of different companies, including application to specific assets only, depending on the structure and needs of an organization. Thirdly, it gives management the choice to seek out other potential buyers by avoiding a bidding war between interested organizations. Finally, past data shows that companies that take a poison pill get a 10 to 20 percent premium from acquirers.
However, a shareholders' rights plan comes with many disadvantages as well - solidifying its nickname as a poison pill. Firstly, as shares are diluted by the implementation of sudden discounts, it reduces the value of existing shares for both private and public companies. Secondly, discord evolves as investors are forced to purchase more shares to maintain their stake in the organization. Lastly, this all discourages institutional investors.