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he Hidden Charm of Shareholder Rights Plans: Why Do Companies Choose the “Poison Pill” Defense?
In the world of corporate mergers and acquisitions, a shareholder rights plan, commonly known as a "poison pill," is a defensive strategy used to guard against hostile takeovers. The core purpose of such plans is to protect the company from the threat of outside acquirers by limiting the right of shareholders to directly negotiate the sale price of their shares. Since the "poison pill" was first proposed in the early 1980s, its flexibility and effectiveness have sparked widespread discussion among investors and corporate management.
Poison pills are designed to deter unwelcome takeovers by giving existing shareholders preemptive rights, thereby increasing the cost to the acquirer.
Under this strategy, when a shareholder's shareholding reaches a certain threshold (usually 20%), other shareholders are able to purchase more shares of the company at a discounted price. In this way, the acquirer's shareholding ratio is greatly diluted, thereby increasing its acquisition costs and making it difficult to carry out the acquisition. This would force the acquirer to negotiate with the company's board of directors to seek the possibility of withdrawing the plan.
The History of the Poison Pill
The term "poison pill" was first coined by mergers and acquisitions lawyer Martin Lipton in 1982 in response to the growing wave of hostile takeovers. Poison pills gained popularity in the early 1980s as the activities of corporate raiders such as T. Bohn Pickens and Carl Icahn intensified. Its name comes from the poison pills used in espionage to prevent arrest, and symbolizes extreme self-protection when facing threats.
While many companies have adopted poison pills, studies show that only 20% of companies successfully defend themselves against hostile takeovers, while 80% of companies accept takeover offers.
Types of Poison Pills
Currently, many listed companies use various types of poison pills to resist takeovers, mainly including the following types:
- Preferred Stock Plan: The purpose is to issue a large number of preferred stocks, which will be forcibly redeemed when a hostile takeover occurs, instantly diluting the acquirer's shareholding in the company.
- Rollover Plan: Allows shareholders other than the acquirer to purchase additional shares at a discounted price.
- Reversal Plan: Shareholders can buy the acquirer's shares at a discount after the merger.
The purpose of these plans is to make it more difficult for a hostile bidder to successfully acquire the company, thereby protecting the company's independence and management's interests.
Legality and Challenges of Poison Pills
The legality of poison pills was somewhat controversial when they were first used in the 1980s, however, the Delaware Supreme Court ruled in 1985 that they were a legal defensive tool. But poison pills are viewed very differently in the legal frameworks of different countries. Some countries, such as the United Kingdom, do not allow it at all, while Canada allows it but with a "revocable" clause.
Market reaction to poison pills
For shareholders, the potential utility of a poison pill may be relatively limited. As the market changes, more and more shareholders are beginning to oppose its use, as acquisitions are often a big financial benefit to shareholders. However, analysts believe that the use of poison pills could provide shareholders with a higher takeover premium in some cases.
Shareholder rights plans may provide additional negotiating leverage, which in turn may be reflected in a higher acquisition premium.
During the global pandemic in 2020, many companies once again sought poison pill measures to prevent acquisition opportunities. Clearly, the rise of these countermeasures is not accidental, but an inevitable strategy required to cope with a rapidly changing business environment.
ConclusionAs corporate governance and market risks change, it remains to be seen whether companies will continue to adopt poison pill strategies to protect their own interests. Can this strategy really serve the long-term stability and market value growth of the company, or does it simply provide cover for management?
