Definition
A shareholder rights plan is the formal name for the defensive instrument commonly called a poison pill. The plan distributes “rights” as a dividend to existing shareholders. Each right typically allows the holder to purchase additional shares (or fractional preferred stock) at a sharp discount when triggered.
Trigger types
- Flip-in — rights become exercisable to buy target shares at a discount
- Flip-over — rights become exercisable to buy bidder shares at a discount in any subsequent merger
Most modern plans combine both.
Term
Plans typically have a term of 1–3 years and are often subject to a sunset provision or annual stockholder ratification.
Adoption process
Adopted by board action without shareholder approval. Subject to Unocal-style enhanced scrutiny under Delaware law: the board must show a reasonable threat and a proportionate response.