Shareholder rights or management rights?

2 March 2006

A few days late, I noticed that Analog Devices has got around to rescinding its anti-takeover plan, first established in 1998 under one of my (least) favourite business euphemisms: the "shareholder rights plan". Otherwise known as poison pills - a much more descriptive term - these plans effectively prevent any attempt to buy a controlling stake in the company and dump its management.

I was always curious where the term "shareholder rights plan" came from, as it was clearly enhancing the rights of the management rather than the shareholders, who would get to cash in on the ambitions of a purchaser. However, timing is important in how these things swing in and out of fashion. 1998 was a surprisingly bad year for electronics companies relative to other stocks. After the technology mini-boom of 1995 crashed and burned, the chipmakers ended up with the third-degree scars. While Internet stocks coughed and continued skyward toward the much bigger collapse of 2001, chipmakers bounced in and out of recession. Looking cheaply valued, a number of electronics stocks decided to fend off being eaten up by deals financed with overvalued paper using these poison pills. The argument generally promulgated at the time was that shareholders would not be sold short by a temporary imbalance in stock-market valuations.

Now it's the era of corporate governance and the idea of a shareholders rights plan, which makes it notionally more difficult for shareholders to sell up, is most definitely unfashionable. I really need to look at how many other companies in the sector are throwing out these late-1990s rules. It's not all that tricky to do: the deal looks to cost ADI about $180,000 by my calculations, given that the rights were worth $0.0005 per share. But is corporate-governance chic the only motivator to toss out these rules?