Question

Defensive tactics such as poison pills and supermajority clauses are designed to resist unfriendly takeovers. Briefly describe how share rights plans work and why they might discourage takeover attempts. Do such tactics work to the advantage of all shareholders all of the time? Discuss.

Answer 1

Shareholders right plan is a strategy in which company offers shares to the sharehoders at a discount in order to dilute the ownership interest in the organization. This is a defensive strategy used, when a shareholder gets a certain percentage of the ownership that is larger than any other shareholder. This strategy allows all the shareholdees to buy shares except the one with large stake. This leads to dilution of bidder's interest , and increase in the bid . This increase in cost of bid , inturn discourages the take over attempt.

The share right plans decreases the value of the stock , so the shareholders who want the takeover to happen will be at the disadvantage . This is so because the dilution in share decreases their power and say to fight the strategy. If the takeover happens after the strategy, then every shareholder will benefit by getting a premium. But if the takeover doesn't take place , then they suffer from decrease in the value of their stake.