Shareholder Rights Plans Information
"Poison Pills" are generally constructed as "shareholder rights plans" whereby the issuing corporation distributes share purchase rights to its shareholders which, upon the occurrence of a triggering event, entitle the holders to purchase common stock or preferred stock of the corporation at an exercise price intended to reflect the long-term value of the corporation.
The triggering events are usually specified to be the acquisition by a third party of a certain percentage of the outstanding common stock of the corporation, or the commencement or announcement of an intention to commence, a tender offer or exchange offer for a certain percentage (usually in the range of 20% to 50%) of the outstanding common stock of the corporation.
Unless the rights' exercise price were less than the market price at that point in time, it is unlikely that the rights would be exercised. However, upon the consummation of a merger or other business transaction involving the corporation where the corporation does not survive, the rights typically entitle the holder to purchase, at the exercise price, that number of shares of common stock of the acquiring party which, at the time of the merger or other business combination, would have a current market value of two times the exercise price.
The extensive dilution that would result from the exercise of this "flip-over" feature should deter a potential "raider" from pursuing a hostile bid.
If the corporation issuing the rights is, or is to be, the survivor in any such acquisition transaction, or a specified higher percentage of its common stock is acquired by the acquiring person, the rights "flip-in" and become the right to purchase, for the exercise price, stock of the issuing corporation having a current market value of twice the exercise price.
This device serves to diminish the pressure on the holders to tender their shares in the first stage of a two-tier takeover since they would be worth substantially more in the second stage.
(i) The rights are usually structured so that they are redeemable at a nominal price at the option of the board of directors of the issuing corporation at any time prior to the time the acquiring party acquires a certain percentage of the common stock of the issuing corporation. This type of redemption provision is designed to give the board the discretion to eliminate the rights before a raider reaches a threshold level of ownership and thereby encourage the raider to negotiate with the board for the acquisition of the corporation and elimination of the rights. Thus, the board serves as a bargaining agent for all shareholders of the corporation.
(ii) The rights are usually not transferable separate from the common stock prior to the time they become exercisable. At such time, rights certificates are issued and the rights become independently transferable.
(iii) Because rights plans involve a distribution to all common stockholders of record, board approval is the only action required to implement such a plan. |
