Shareholder Rights Plan

Quick Facts

Common name: Poison pill

Purpose: Defensive mechanism against hostile takeovers

Trigger: Typically 15-20% ownership threshold

Duration: Usually 1-3 years with renewal options

Legal status: Upheld by Delaware courts (1985)

A shareholder rights plan (commonly called a "poison pill") is a defensive mechanism that allows existing shareholders to purchase additional shares at a discount if any single shareholder acquires more than a specified percentage of the company's stock. It's the most common and effective hostile takeover defense.

In Plain English

A shareholder rights plan makes hostile takeovers prohibitively expensive. If an unwanted acquirer crosses the ownership threshold (usually 15-20%), every other shareholder gets the right to buy shares at half price. This massively dilutes the hostile bidder's stake, making the takeover economically impossible without board approval.

How It Works

The Mechanics

Board adopts plan: Rights issued to all shareholders
Rights attached to shares: Trade along with common stock
Trigger threshold set: Usually 15-20% ownership
Hostile acquirer crosses threshold: Rights become exercisable
Flip-in feature activates: All shareholders except the acquirer can buy shares at 50% discount
Acquirer's stake diluted: Takeover becomes uneconomic

Flip-In vs. Flip-Over

Flip-In Right:

Shareholders can buy target's shares at discount
Dilutes acquirer's stake in target
Most common feature

Flip-Over Right:

If target is merged into acquirer
Shareholders can buy acquirer's shares at discount
Protects against back-end squeeze-out

Typical Terms

Feature	Standard Provision
Trigger threshold	15-20%
Discount	50% of market price
Duration	1-3 years (renewable)
Redemption price	Nominal ($0.001 per right)
Board discretion	Can waive for friendly deals
Shareholder vote	Typically not required

Types of Pills

Traditional Poison Pill

Standard trigger (15-20%)
Designed for hostile takeover defense
Duration: 1-3 years

Low-Trigger Pill (COVID Pills)

Lower threshold (5-10%)
Deployed during market volatility
Prevents opportunistic accumulation
Gained popularity in 2020

Net Operating Loss (NOL) Pill

Very low trigger (4.9%)
Protects tax assets
Prevents ownership change under IRC Section 382
Courts more accepting of lower threshold

Dead Hand / Slow Hand Pills

Only continuing directors can redeem
Limits new board's ability to remove
Highly controversial
Struck down in some jurisdictions

Famous Shareholder Rights Plans

Netflix (2012)

When Carl Icahn accumulated a 10% stake, Netflix adopted a pill with a 10% trigger to prevent further accumulation without board engagement.

Twitter (2022)

After Elon Musk disclosed a 9.2% stake, Twitter's board adopted a pill with a 15% trigger. Musk eventually negotiated with the board for the $54.20/share acquisition.

Airgas (2011)

Airgas maintained its poison pill for over a year despite Air Products' hostile bid and shareholder support for the deal—upheld by Delaware courts as valid board discretion.

Legal Framework

Delaware Validation

Moran v. Household International (1985) established:

Boards can adopt pills without shareholder approval
Pills are valid exercise of business judgment
Part of directors' fiduciary duty toolkit

Continuing Judicial Support

Airgas (2011) confirmed:

Boards can "just say no" to hostile offers
Pills can be maintained even against shareholder wishes
Board's duty is to shareholders, not individual bidders

Limits on Pills

Courts have struck down:

"Dead hand" pills (only certain directors can redeem)
Pills adopted solely to entrench management
Pills with unreasonably low triggers (except NOL pills)

Strategic Considerations

For Target Boards

Benefits:

Forces negotiation with the board
Provides time to find alternatives
Protects against opportunistic bids
Can be removed for friendly deals

Drawbacks:

Institutional investors may oppose
Proxy advisors often recommend against
May suppress legitimate premium offers
Creates entrenchment perception

For Potential Acquirers

Pills don't make takeovers impossible—they force acquirers to:

Negotiate with the board
Launch proxy fight to replace directors
Wait for pill expiration
Make offers compelling enough that board removes pill

Institutional Investor Views

Many institutional investors oppose pills:

ISS: Generally recommends against unless short-term and justified
Glass Lewis: Similar opposition to long-term pills
BlackRock/Vanguard: Often vote against pill ratification

Companies increasingly submit pills to shareholder vote, and many are rejected.

"Shelf" Pills vs. Active Pills

Active Pill:

Currently in effect
Rights issued and ready to trigger

Shelf Pill:

Prepared but not adopted
Can be implemented quickly if threat emerges
Increasingly common approach

Most large companies have a shelf pill ready for rapid deployment.

Practical Takeaways

For target companies: Shareholder rights plans remain the most effective takeover defense. Keep a shelf pill ready. If adopted, expect institutional investor scrutiny—be prepared to explain the specific threat and limited duration.

For potential acquirers: Don't expect to bypass the board. A pill means you must either negotiate a friendly deal or wage a proxy fight to replace directors who will redeem the pill. Plan for a longer, more expensive process.

Poison Pill — Same defense, different name
Hostile Takeover — What shareholder rights plans defend against
Proxy Fight — How acquirers circumvent pills
Staggered Board — Defense that strengthens pill effectiveness