A shareholder rights plan, colloquially known as a "poison pill", is a type of defensive tactic used by a corporation's board of directors against a takeover. In the field of mergers and acquisitions, shareholder rights plans were devised in the early 1980s as a way for directors to prevent takeover bidders from negotiating a price for sale of shares directly with shareholders, and instead forcing the bidder to negotiate with the board.
The typical shareholder rights plan involves a scheme whereby shareholders will have the right to buy more shares at a discount if one shareholder buys a certain percentage of the company's shares. The plan could be triggered, for instance, when any one shareholder buys 20% of the company's shares, at which point every shareholder (except the one who possesses 20%) will have the right to buy a new issue of shares at a discount. If every other shareholder will be able to buy more shares at a discount, such purchases will dilute the bidder's interest, and the cost of the bid will rise substantially. Knowing that such a plan could be called on, the bidder could be disinclined to the takeover of the corporation without the board's approval, and will first negotiate with the board so that the plan is revoked.
While the poison pill is legal in Delaware (the predominant jurisdiction of incorporation in the U.S.), the court will frequently scrutinize these plans carefully.
Do you think the a board of directors should have the right to implement the poison pill? Should the board be able to force potential acquirors to negotiate directly with the board rather than the shareholders? Does the Pill have a tendency to entrench management? Or is the board typically in the best position to get the maximum deal for all shareholders? Does a poison pill potentially prevent activist investors like Carl Icahn or Bill Ackmann from obtaining control of the company and reducing jobs?