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.