Series 79 practice questioneasyAnti-Takeover Defenses
A 'poison pill' (shareholder rights plan) is designed to:
- ADilute the ownership stake of a hostile acquirer by allowing other shareholders to purchase shares at a discount✓ Correct answer
- BIncrease the company's dividend payments
- CRequire all shareholders to tender their shares in a hostile bid
- DProhibit the company from issuing new shares
Explanation
Why A — Dilute the ownership stake of a hostile acquirer by allowing other shareholders to purchase shares at a discount
A poison pill, formally known as a shareholder rights plan, is triggered when an acquirer crosses a specified ownership threshold (typically 10-20%). Once triggered, all shareholders except the acquirer can purchase additional shares at a substantial discount, massively diluting the acquirer's ownership stake. This makes a hostile acquisition prohibitively expensive and forces the acquirer to negotiate directly with the target's board rather than going directly to shareholders.
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