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Screenshot of a breaking news alert e-mail from Q2 2017
Retail forex broker FXCM Inc (NYSE:FXCM) has adopted a ‘poison pill’ shareholder rights plan, to prevent a takeover of the company unless agreed to by the board of directors.
Contrary to reports on other blogs, which got it wrong, this is not about raising money.
With FXCM’s share price way down following its close shave with insolvency and its subsequent raising of a $300 million lifeline from Leucadia, it appears as thought the board and management want to make sure that they have a say in the eventual fate of the company.
What is a poison pill? And what is a shareholder rights plan?
A poison pill is is a type of defensive tactic used by a company against a potential takeover. A shareholder rights plan is a very common type of poison pill.
Shareholder rights plans were devised in the early 1980s as a way for corporate directors to prevent acquirers from negotiating a price for the company directly with shareholders – instead forcing the bidder to negotiate with the Board. Shareholder rights plans are unlawful without shareholder approval in many jurisdictions such as the UK, are frowned upon in others such as throughout most of the EU, but are lawful if used “proportionately” in others, including Delaware in the United States where many public companies are incorporated – including FXCM.
The typical shareholder rights plan involves a scheme whereby shareholders have the right to buy (many) more company shares at a discount, if anyone buys a certain percentage of the company’s shares. The plan could be triggered, for example in FXCM’s case, when any one shareholder buys 10% of the company’s shares, at which point every shareholder (except the one who bought the 10% stake) will have the right to buy a new issue of shares at a huge discount, thereby diluting the acquirer.
Knowing that such a plan could be called on, the bidder could be disinclined to the takeover of the company without the Board’s approval, and will first negotiate with the Board so that the plan is revoked.
Shareholder rights plans, or poison pills, are controversial because they hinder an active market for corporate control.
The full details of FXCM’s shareholder rights plan can be seen here.