Subject: Stocks - Shareholder Rights Plan

Last-Revised: 3 Jun 1997
Contributed-By: Chris Lott (contact me), Art Kamlet (artkamlet at aol.com)

A shareholder rights plan basically states the rights of a shareholder in a corporation. These plans are generally proposed by management and approved by the shareholders. Shareholder rights are acquired when the shares are purchased, and transferred when the shares are sold. All this is pretty straightforward.

The interesting question is why such plans are proposed by management. This is probably best answered with an example. One example is rights to buy additional shares at a low price, rights that first become exercisable when a person or group aquires 20% or more of the common shares of the company. In other words, if a hostile takover bid is launched against the company, existing shareholders get to buy shares cheaply. This serves to dilute the shares held by the unfriendly parties, and makes a takeover just that much more difficult and expensive.

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