[center][b][size=5]Shareholder Rights Plan[/size][/b][/center]
Last-Revised: 3 Jun 1997 Contributed-By: Chris Lott (contact me), Art Kamlet (artkamlet at aol.com)
A shareholder rights plan basically states the rights of a shareholder in a corporation. These plans are generally proposed by management and approved by the shareholders. Shareholder rights are acquired when the shares are purchased, and transferred when the shares are sold. All this is pretty straightforward.
The interesting question is why such plans are proposed by management. This is probably best answered with an example. One example is rights to buy additional shares at a low price, rights that first become exercisable when a person or group aquires 20% or more of the common shares of the company. In other words, if a hostile takover bid is launched against the company, existing shareholders get to buy shares cheaply. This serves to dilute the shares held by the unfriendly parties, and makes a takeover just that much more difficult and expensive.
[url] http://invest-faq.com/cbc/stock-shareh-rights.html [/url]
Shareholder Rights Plan
Despite its name, this plan differs from the standard shareholder rights outlined by the government (the six rights we touched on). Shareholder rights plans outline the rights of a shareholder in a specific corporation. A company's shareholder rights plan, it is usually accessible in the investor's relations section of its corporate website or by contacting the company directly.
In most cases, these plans are designed to give the company's board of directors the power to protect shareholder interests in the event of an attempt by an outsider to acquire the company. To prevent a hostile takeover, the company will have a shareholder rights plan that can be exercised when another person or firm acquires a certain percentage of outstanding shares.
The way a shareholder rights plan may work can be best demonstrated with an example: let's say Cory's Tequila Co. notices that its competitor, Joe's Tequila Co., has purchased more than 20% of its common shares. A shareholder rights plan might then stipulate that existing common shareholders have the opportunity to buy shares at a discount to the current market price (usually a 10-20% discount). This maneuver is sometimes referred to as a "flip-in poison pill". By being able to purchase more shares at a lower price, investors get instant profits and more importantly, they dilute the shares held by the competitor, whose takeover attempt is now more difficult and expensive. There are numerous techniques like this that companies can put into place to defend themselves against a hostile takeover. (see The Wacky World of M & A)
[url] http://www.investopedia.com/articles/01/050201.asp [/url]