Agenda: What is a Rights Plan and What is its Purpose? Why the Recent Increase in Rights Plans? Advantages/Disadvantages; NOL Rights Plans; How It Works; Other Pill Provisions; and, Delaware Law.
What is a Rights Plan and What is its Purpose?
Rights Plans were created a little over two decades ago as a means to fend off hostile/abusive takeover attempts and today are an accepted part of the corporate landscape.
In Moran v. Household International, Inc., 500 A.2d 1346 (Del. 1985), the Delaware Supreme Court upheld the validity of Rights Plans.
Before the invention of the Rights Plan, the Board of a target company was largely defenseless against a hostile tender offer, even if it believed the offer was underpriced or coercive to stockholders.
A Rights Plan is intended to act as a deterrent to any person or group of affiliated or associated persons becoming the beneficial owner of more than an established trigger amount without the prior approval of a company’s Board.
The deterrent effect arises from the imposition of substantial economic and voting dilution upon any stockholder that accumulates shares exceeding the Rights Plan trigger amount.
This risk of dilution, combined with the authority of the Board to redeem Rights, gives potential acquirors a powerful incentive to negotiate with the Board rather than proceeding unilaterally.
Generally, Rights Plans remain the single most effective device available to Boards of Directors and is one element of an overall strategy to maximize stockholder value.
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