My company has adopted a “Stockholder Rights Plan,” and I’m trying to understand it.
Basically, each current stockholder will receive a dividend of one non-voting right for each share of common stock owned. Each right initially entitles the holder to purchase one one-thousandth (1/1000) of a share of Series A Preferred stock at a purchase price of $400.00 per share (our common stock now trades at about $80). The terms of this new preferred stock are structured so one share of this preferred stock has similar rights to 1,000 shares of common stock.
Initially, the rights are attached to the shares of common stock are not exercisable, and do not represent any significant value to stockholders. Upon certain events, however, the rights become exercisable and would trade independently from the common stock. These events include an entity acquiring more than 10% of the outstanding shares, or the announcement of a tender offer to acquire the company.
If that happens, each right will then entitle its holder (other than a holder who has equaled or exceeded an “ownership threshold” - that is, the would-be acquirer), upon payment of the purchase price, to acquire shares of the Series A Preferred Stock having a value of twice the purchase price. In the event of a subsequent merger or other acquisition, holders of rights (other than the acquiring entity) may acquire, upon payment of the purchase price, shares of the acquiring entity (or an affiliate) having a value of twice the purchase price.
The board of directors is permitted to redeem the rights for $.001 per right at any time before the acquisition.
Can someone smart in this area explain how this is a stockholder rights plan and not a Board of Directors rights plan?
First off, it might make more sense to think of these rights as a long call option. Not sure if you’re familiar with what a “long (as opposed to short) call option” is.
A call is the right but not the obligation to purchase something in the future at a specific price. (If you sold or shorted a call, that means someone else has the right but not the obligation to buy from you).
Uhh, I’m a little unclear from the description. My off the cuff view is this is a sort of “poisen put” aka to make your company much less of a takeover target. If no one tries to take over your company, then these “rights” are worthless and useless. If someone does try to take over the company, then you can buy shares for half of the market price (if I read this correctly). That’s a good deal for you. Or, you can buy shares in the acquiring company for half the market price.
Long story short, it makes your company more expensive to take over. If you are taken over, then your rights help you cash out.
Again, assuming I read this correctly, this is a stockholder rights plan. You would get benefits in the event of a takeover. The standard takeover is to provide a bid at around market price and often times some sort of cushy incentive to the board of directors. The board then recommends that everyone accepts the offer.
Ultimately, all shareholder rights plans are ultimately Board of Directors rights plans – the typical goal is to prevent a takeover and therefore insulate the management from wholesale change. In a sense, shareholders can never lose in a takeover attempt, because the way a company is taken over is to pay the shareholders more for the stock than it is worth.
What you’ve described is commonly known as a “poison pill.” And IMHO you’re right - poison pills are more for the benefit of management than shareholders. IMHO, poison pills hurt shareholders because they discourage tender offers which are typically made in amounts significantly greater than the trading price of the stock in question.
Of course it is technically true that the pill gives shareholders rights to buy stock at certain times. It’s possible to see this as a benefit to the regular shareholder who might wish management to continue in the current vein, but there’s a limit to this. After all, if shareholders don’t like the way the company is run by new management (or will be run by new management when a takeover is pending), they can simply cash out and find an investment more to their liking. (It’s like the difference between a pound of lead and a pound of feathers – one sounds better than the other, but they’re both a pound.)
Of course this breaks down if (as is increasingly the case) shareholders have additional interests in the company, such as if they are also employees or even customers. If that’s the case they may have a legitimate reason to oppose a takeover attempt whereas pure shareholders’ interests should be limited simply to $$$.
Finally, the justification for poison pills (and shark repellant generally) is essentially a bribe of top management with the promise of job security with the understanding that they wouldn’t be willing to take the job otherwise. Assuming good management leads to higher stock prices, the shareholder is willing to lose the possibility of a big score from a takeover attempt for a better chance of value-growth as a result of good management.
