SHAREHOLDER’S RIGHTS PLAN AND OTHER DEFENSIVE MECHANISMS

Abstract

Corporate world is a whole different cosmos paralleled to the real world we live in. A world with its own jurisprudence to be governed. Just like individuals, corporations are seen as individuals that subsist under the regulations. With a motive of growth, we can see vicious actions by corporations to both attack and defend each other and thereby survival and growth gives rise to new opinions, interpretations, ideas and strategies. Shareholders’ Rights Plan or commonly known as the Poison Pill is one such exemplary innovations that helped multiply survival chances of a number of corporations. Poison pill is a mechanism which drastically changes the situation of corporations during hostile takeover. This paper seeks to provide a thorough explanation of the mechanism and also dwell into its birth and understanding it in the Indian context.

To ward off unwelcomed bid by an acquiring company, a target company uses the mechanism of poison pill and protect themselves from being taken over. The board of directors of a company acting as the brain for the corporation is entrusted to look out for the best interests of the company including the shareholders and with such limited managing capacity, they cannot control a takeover that is under the capacity of the shareholders. Mergers and acquisitions have become a huge business in the corporate world and the value of which is above 4 trillion dollars. Most of the mergers and acquisitions are done in the nature of an agreement with the board of directors of a company, while about 20 percent of the others lead to a situation of hostile takeover. In such a situation the board of directors can either back out and watch the company being sold or use mechanisms such as the poison pill.