Purpose: To assist management in implementing poison pills that protect their companies from hostile takeover efforts.

Companies often adopt shareholder-rights plans, known as poison pills, as a defense against hostile takeover efforts that may occur when their stock price is temporarily depressed. A shareholder-rights plan gives each current stockholder in a company the right to buy additional shares of their company and shares of any acquiring company at a deep discount to their fair market value. The poison pill is typically triggered when an outside person or group acquires more than a specified percentage of the company’s shares. These additional shares serve to dilute the ownership of a hostile bidder, thereby reducing the threat of a takeover by coercive or unfair tactics.

The complex financial issues involved with shareholder-rights plans and the need to establish the exercise price associated with the poison pill are two reasons to engage a valuation expert. The exercise price is the price at which current shareholders may purchase additional shares of stock and is reflective of the long-term value of the company.