This is the first of a two-part series that will address the nuts and bolts of stockholder rights plans, or poison pills, as defensive mechanisms for public companies. Next week’s installment will focus on recent Delaware cases regarding poison pills, new technologies and recent trends.
Stockholder rights plans were born in the 1980s in response to the proliferation of corporate raiders making hostile bids for public companies, and were designed to provide public company boards of directors with a “poison pill” to defend themselves against hostile takeover bids. Stockholder rights plans allow the target board of directors time and leverage to negotiate for a control premium or other alternatives to hostile bids. Triggering a poison pill results, in theory, in unpalatable dilution to the potential acquirer’s ownership interest and increased acquisition cost, thereby forcing a potential acquirer to negotiate with the target board of directors prior to completing any acquisition.
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