For more than two decades, shareholder rights plans or “poison pills” have been a mainstay of takeover preparedness and defense. The legal validity of these instruments is unquestioned; even some institutional shareholders have come to accept their effectiveness and utility. Rights plans neither interfere with negotiated transactions nor preclude unsolicited takeovers, yet they are a powerful negotiating tool and have been shown to increase the acquisition premium paid to shareholders.[FOOTNOTE 1]
Despite its success, the poison pill continues to be attacked: because properly drafted rights plans ensure that a target’s board of directors retains bargaining power in a potential change-of-control transaction, they are unpopular with many shareholder activists who believe that shareholders should have the authority to accept or reject a takeover offer. These activists have put increasing pressure on companies to qualify or eliminate their rights plans. With the spotlight of public attention now shining bright on corporate governance, companies must take the opportunity to review their takeover preparedness and consider the extent to which a poison pill can be a valuable part of the overall picture. We continue to believe that the shareholder rights plan remains an important part of the takeover defense arsenal of public companies and caution against companies’ limiting their flexibility in the takeover context simply to increase their corporate governance ratings.
