Stockholder Rights Plan
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, also known as a “Poison Pill,” is an anti-takeover measure adopted by a company to protect itself from hostile takeovers. 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 a potential acquirer to gain control of the company.
Origin: The Shareholder Rights Plan originated in the United States in the 1980s, a period marked by frequent corporate mergers and acquisitions, with many companies facing the threat of hostile takeovers. In 1982, attorney Martin Lipton first proposed the concept of the “Poison Pill” and implemented it in his client companies, achieving significant results. Subsequently, this strategy was quickly adopted by other companies and became a common anti-takeover measure.
Categories and Characteristics: Shareholder Rights Plans are mainly divided into two categories: triggered and non-triggered.
- Triggered: The plan automatically takes effect when a potential acquirer holds a certain percentage of the company's shares, allowing existing shareholders to purchase new shares at a discount, thereby diluting the acquirer's stake.
- Non-triggered: The company's board of directors can decide whether to activate the plan based on specific circumstances, offering greater flexibility.
- Protecting the company from hostile takeovers
- Increasing acquisition costs
- Enhancing the negotiating power of the company's management
Specific Cases:
- Case 1: In 2004, Microsoft implemented a Shareholder Rights Plan to prevent potential hostile takeovers. The plan stipulated that if any individual or group attempted to acquire more than 20% of Microsoft's shares, existing shareholders would have the right to purchase additional shares at a discount, thereby diluting the acquirer's stake.
- Case 2: In 2012, Netflix adopted a Shareholder Rights Plan to counter the takeover threat from activist investor Carl Icahn. The plan allowed existing shareholders to purchase new shares at a discount if any individual or group held more than 10% of the company, thereby diluting Icahn's stake.
Common Questions:
- Question 1: Does a Shareholder Rights Plan harm shareholder interests?
Answer: While a Shareholder Rights Plan may reduce short-term returns for shareholders, it can protect the company from hostile takeovers in the long run, preserving the company's independence and long-term interests. - Question 2: Is a Shareholder Rights Plan legal?
Answer: In most jurisdictions, Shareholder Rights Plans are legal but must comply with relevant laws and regulations and be approved by the company's board of directors.
