What Is a Shareholder Rights Agreement
As the COVID-19 pandemic continues to drive down stock prices, investment bankers have begun to recommend that publicly traded companies consider introducing shareholder rights plans to prevent strategic buyers and private equity firms from acquiring them at a lower cost, i.e. at prices that do not reflect their intrinsic long-term value. The most important consideration – and the reason why the number of shareholder rights plans has increased tenfold over the past 20 years – is that shareholder advisory firms such as Institutional Shareholder Services (ISS) have threatened to recommend that shareholders retain the votes of directors working in companies that have adopted shareholder rights plans that do not meet certain requirements. As a result, many publicly traded companies now face a conflict between the boards of reputable investment banks and the persistent spectre that adopting a shareholder rights regime will result in a reduction in their governance ratings and will essentially vote against their directors. In 2012, Netflix adopted a poison pill (shareholder rights plan) to prevent Karl Icahn from a hostile takeover. When Netflix learned that Icahn had acquired a 10% stake in the company, it immediately went on the defensive. Any attempt to buy a large stock market position in Netflix without board approval would result in the market flooding of new shares, making any attempt at participation very costly. The pace of adoption and implementation of shareholder rights plans has accelerated significantly in recent months, as the COVID-19 pandemic and associated financial crisis have fueled acute volatility in equity markets and negatively impacted the market capitalization of a wide range of publicly traded companies. This trend could make otherwise healthy companies vulnerable to opportunistic hostile takeover bids and rapid or creeping accumulations of large and potentially controlling blocks of shares. In addition, you want to indicate the level of commitment you require from each shareholder. You can determine whether the time spent working in the company has some value and can be considered a material obligation. As of March 2020, 22 companies have adopted rights plans, the highest monthly adoption of rights plans in recent times according to DealPoint tracking, compared to five companies during the same period in 2019.
The number of US-based companies that adopted a rights plan from 1 January 2020 to 20 April 2020 (44) exceeds the number of US-based companies that adopted a rights plan throughout 2019 (32). Poison pills are sometimes used more broadly to describe other types of defensive measures against takeovers when the target takes action. While the broad category of takeover defense (better known as “shark repellents”) includes the traditional poison pill of the shareholder rights regime. Other anti-takeover protections include: How dividends are distributed among shareholders is very important to shareholders, and it is an important part of any shareholder agreement. You can pay dividends quarterly, every six months or once a year. Dividends are business gains, and the way your dividends are calculated is set out in the shareholders` agreement. Investors will want to know how they will make money from their investment and what your plan is to distribute the money. If a company believes that a decline in its share price has made its shareholders vulnerable to low-cost offers, it should consider adopting a shareholder rights regime.
Usually, the decision to adopt a shareholder rights plan can be a difficult one, as it can attract unwanted investor attention and ISS`s negative vote recommendations. However, many believe that the dramatic decline in stock prices in all areas tends to divert the negative attention that usually follows the adoption of a shareholder rights plan. We also point out that on April 8, 2020, ISS published the “Impact of the COVID-19 Pandemic” policy guidelines, which state: “A sharp drop in prices resulting from the COVID-19 pandemic is likely to be considered a valid justification for the introduction of a pill with a duration of less than one year in most cases; However, management bodies should provide detailed information on their choice of duration or on the decisions taken in order to delay the plans beyond that period or to avoid the plans being put to a vote by the shareholders. “Ultimately, of course, boards need to do what they think is right for their shareholders.