A “poison pill” or shareholder rights plan is generally intended to deter hostile takeover attempts, experts say.
While there are different varieties, basically they give current shareholders the right to buy additional shares at a steep discount.
“Everyone gets to buy those shares except for the hostile takeover, the uninvited guest,” said Thomas L. Hanley, chair of the public companies practice group at Stradley Ronon Stevens & Young LLP in Philadelphia.
The poison pills are triggered when share purchases by these “uninvited guests” reach a certain stock ownership threshold, which can range as high as 20% or as low as 5%, Mr. Hanley said.
Companies are adopting the plans “to address the market dislocation, and the threat that they could potentially be subjected to opportunistic share purchases by activist investors trying to take advantage of depressed stock prices caused by the pandemic,” said J. Timothy Mast, a partner with Troutman Sanders LLP in Atlanta, who represents companies in complex business disputes.
The tactic emerged in the 1980s to address corporate raiders, observers say. The Delaware Supreme Court approved their use in its 1985 ruling in Moran V. Household International Inc.
In that case, the court ruled a shareholders rights plan’s adoption was within the company directors’ authority because, in accordance with the business judgment rule, they had acted on an informed basis, in good faith, and in the belief their action was in the company’s best interests.
