Twenty-five years ago next month, in the landmark case Moran v. Household International Inc., 500 A.2d 1346 (Del. 1985), the Delaware Supreme Court upheld the validity of a then novel security, a “shareholder rights plan.” Before the invention of the rights plan, now commonly known as the “poison pill,” the board of a target company was largely defenseless against a hostile tender offer, even if it believed the offer was underpriced or coercive to stockholders.
The pill changed all that. A standard rights plan gives common stockholders one “right” per share, exercisable upon a triggering event, typically the acquisition by a person or company of more than a fixed percentage of outstanding shares (usually between 10% and 20%). The rights permit the holder to acquire additional shares of stock, either in the target company or in the acquiring company, at prices far below market — but rights may not be exercised by the person or company whose acquisitions triggered the plan. The result is that everyone but the hostile bidder receives extra shares, the bidder is substantially diluted and the target board of directors is again in a position to influence the course of the takeover fight.
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