In recent years, many companies have realized that a “poison pill” policy may be necessary to stave off unsolicited takeover bids. A poison pill, also known as a Shareholder Rights Agreement, restricts the shareholders‘ ability to sell or transfer shares of the company upon a triggering of a certain event, such as a takeover bid. For companies that don’t want to adopt such an agreement unless it is necessary, but who want the power to enact one on short notice, it is advisable to adopt and draft a written policy giving the Board of Directors this power.

These policy provisions should state in a recital that the Board of Directors believes it is in the best interests of the company and the shareholders to give the Board the ability to protect the interests of the company and shareholders by being able to adopt a shareholder rights agreement in certain circumstances on short notice so long as the Board is acting in good faith an consistent with the exercise of its fiduciary duties. The policy should grant the Board the rights to adopt a shareholder rights agreement without prior shareholder approval, however, it should not be retained without subsequent shareholder approval.

The definition of a “triggering event” should be outlined in this policy, which usually is defined as an “unsolicited tender offer or unsolicited third party acquisition of a specified percentage of stock.” Both the Board and the shareholders, to ensure they are on the same page, should adopt the policy and execute it accordingly.

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