How Do Shareholder Rights Plans Work?
A Brief Example The shareholder rights plan is effective as a defense against a hostile takeover by substantially diluting the potential acquirer’s interest in the company. Consider a plan with the following provisions for a company with 10 million shares outstanding and a current market price of $10 per share: • Trigger Event – Ownership by a single shareholder of a 20% block of shares. • Exercise Price – $50 per right. • Dilution Adjustment Factor – Shareholders exercising rights are entitled to receive newly issued common shares with a then current market value of two times the exercise price, or $100. • Redemption Price – $0.01 per right. • Term – 10 years Under the terms of the plan, the accumulation of 2 million shares by a potential acquirer would constitute a trigger event, which would allow the owners of the remaining 8 million shares to exercise the rights attached thereto. Therefore, in exchange for the $50 per right exercise price, each shareholder, except the potential acq
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