As the market continues to correct itself and interest rates drop to their lowest levels since 1994, many companies are vulnerable to unsolicited offers from potential acquirers who may have large sums of cash or access to relatively inexpensive financing. In today’s environment, the adoption of a shareholder rights plan should be at the top of companies’ agendas.

Since being introduced in 1982, shareholder rights plans, otherwise known as "poison pills," have established a takeover defense that makes it prohibitively expensive for an unwelcome bidder to acquire a large stake in a target. Poison pills are basically designed to deter coercive takeover tactics and to encourage third parties interested in acquiring a company to negotiate with the company’s board.

Shareholder rights plans do not guarantee insulation from a hostile bid, rather they can complicate an unsolicited bidders’ efforts, and often wind up forcing the bidder and target to negotiate a friendly deal at a higher price. Studies by Georgeson & Company, Inc. have provided evidence that rights plans provide increased bargaining power, which results in higher prices for stockholders.

One sector of the U.S. economy where takeover defenses have increased substantially this year compared to last year is technology. Through December 31, 2001, close to 170 technology companies, including biotechs, have implemented poison pills, compared with just 77 in the same period of 2000. Historically, many technology companies have been protected against hostile bids without adopting traditional measures such as poison pills. For one thing, hostile bidders have been reluctant to take action due to the common view that employees would leave if an unwelcome bidder succeeded. In addition, many companies with high valuations operated under the assumption that a potential bidder would be unwilling or unable to pay a premium to the market price.

Now, however, with the major market correction, many companies do not have much in the way of defensive measures. Yahoo, Gateway, Inktomi, Palm and Scient are only a handful of technology companies that recently adopted shareholder rights plans.