A Shareholder Rights Plan (an ‘SRP’), sometimes referred to as a ‘poison pill’,
is a formalized plan sometimes adopted by a company’s Board in an attempt to thwart
a potential third-party takeover bid. In simple terms, a typical SRP involves a
scheme that provides shareholders with a right to purchase shares at a discount
from market in circumstances where one shareholder buys a stated percentage of the
company's shares.
The goal of a SRP is to force a bidder to first negotiate with the target's board,
as contrasted with making its bid directly to the shareholders. In theory, where
an SRP exists:
- a bidder for control or all of the outstanding shares of a company might not be
willing to go forward with a bid with the approval of the target company’s Board,
and hence might first negotiate with the Board to either revoke the plan or promote
a ‘friendly takeover’; or,
- the target company’s Board may have time to find competing offers that maximizes
selling price, which may generate a higher takeover premium than would be the case
if no SRP existed.
Not all jurisdictions are favourable to SRPs. In Canada, almost all SRPs include
provisions that enable a bidder who conforms to the requirements of a permitted
bid to complete an acquisition without triggering the dilution provisions included
in an SRP. Moreover, in Canada SRP’s are weakened by the ability of a hostile acquirer
to petition the Securities Regulators to have the company's SRP overturned. Generally,
Canadian Courts will overturn a SRP to allow shareholders to decide whether they
want to tender to a bid, although sometimes the company may be allowed to temporarily
maintain the SRP to see if a higher bid can be obtained.
Where a company introduces a Shareholder Rights Plan, that may be an indicator (not
a certainty) that the Board of the possible target company:
- believes that the equity markets are under-pricing the shares of the company at
the time the Plan is introduced; or,
- is concerned that there may be one or more possible near-term bids for their company’s
outstanding shares.
Accordingly, appropriately researched, the introduction of a Shareholder Rights
Plan may lead to an trader finding a trading opportunity, or to an investor finding
an investment opportunity.
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