The key invention that protects from Corporate Sharks

Sometimes the shareholders need  level playing field.
The 1980s was the peak time when the corporate sharks could have your company for breakfast and you couldn’t do much as a shareholder.

The shareholders desperately needed some equal playing field.

And this came at the time when the Corporate power struggle started showing its teeth, which brought the need to ward off the Corporate sharks. The shareholders rights plan is popularly known as poison pills since it is a type of defensive tactic used by the board of directors against a hostile takeover.

In case of hostile takeovers an open offer is directly made to the shareholders. Such a takeover may help to unlock the hidden value of the shares and puts pressure on the management to work efficiently.
But  it also has the potential to havoc the normal functioning of a target company.

Such a plan activates itself and gives shareholders the right to buy more shares at a discount if one shareholder buys a certain percentage or more of the company’s shares beyond a predefined threshold.

For example, if any shareholder acquires 20% of the company’s shares, at which point every shareholder (except the one who possesses 20%) will have the right to buy a new issue of shares at a discount.

If every other shareholder can buy more shares at a discount, such purchases would dilute the bidder’s interest substantially, and the cost of the bid would make the price skyrocket. The objective is to make it unfeasible for the buyer to proceed with takeover of the corporation without the board’s approval. Buyer has no option but to first negotiate with the board to revoke the plan.

Flip-in

This clause permits shareholders, except for the acquirer, to buy additional shares at a predefined discount. This provides investors with instantaneous profits. This pill also diluted shares held by the acquiring company, making the takeover attempt far more expensive.

Flip-over: Exodus of Talents

Acquirer’s shares after the merger are available at a discount to shareholders. Hence, a shareholder may gain the right to buy the stock of its acquirer, in subsequent mergers at say 2:1 ratio.

The rider can re-phrase all its employees’ stock-option grants to ensure they immediately become vested if the company is taken over. Employees can then exercise their options and then dump the stocks. With the release of the “golden handcuffs,” disgruntled employees may quit immediately after having cashed in their stock options, But creates an exodus of talented employees, bringing down the value of the target. In many high-tech businesses, attrition of talented human resources may result in a diluted or empty shell being left behind for the new owner.

The target assured  if it were acquired within 24 months by its rival, and product support were to be reduced within four years.

This obligated them to refund their customers between two and five times the price of software licenses.

Still, the acquisition prevailed, the likely cost to Oracle was much as US$1.5 billion.

Voting plan

In this method, the company releases preferred stock with superior voting rights over that of common shareholders and prevent an unfriendly bidder despite acquiring a substantial quantity of the target firm’s voting common stock from being able to exercise control over its purchase.

For example, ASARCO established a voting plan in which 99% of the company’s common stock would only harness 16.5% of the total voting power.

This is undoubtedly the most important invention in the field of corporate of law. Not all the poison pills may be completely legal everywhere, and in addition to these pills, a “dead-hand” provision allows only the directors who introduce the poison pill to remove it (limited by pre-set time after their placement), thus potentially delaying a new board’s decision to sell a company.