Shareholder rights plan

A shareholder rights plan, colloquially known as a "poison pill", is a type of defensive tactic used by a corporation's board of directors against a takeover.

In the field of mergers and acquisitions, shareholder rights plans were devised in the early 1980s as a way to prevent takeover bids by taking away a shareholder's right to negotiate a price for the sale of shares directly.

Typically, such a plan gives shareholders the right to buy more shares at a discount if one shareholder buys a certain percentage or more of the company's shares.^[1] The plan could be triggered, for instance, if any one shareholder buys 20% of the company's shares, at which point every shareholder (except the one who possesses 20%) will have the right to buy a new issue of shares at a discount. If all other shareholders are able to buy more shares at a discount, such purchases would dilute the bidder's interest, and the cost of the bid would rise substantially. Knowing that such a plan could be activated, the bidder could be discouraged from taking over the corporation without the board's approval, and would first negotiate with the board in order to revoke the plan.^[2]

The plan can be issued by the board of directors as an "option" or a "warrant" attached to existing shares, and only be revoked at the discretion of the board.