Desktop Stock Ticker | Shareholder Rights? Not So Much

Shareholder Rights? Not So Much

Sometimes, managements will adopt so-called Shareholder Rights Plans that “protect” shareholders from hostile takeovers. Often, though, such plans have unenthusiastic effects for shareholders. In such cases, these plans are designed to protect managements rather than shareholders. Consider events last year at LCA-Vision (LCAV), a stock we’ve discussed as a potential value play.

The founders of LCAV (who left the company a few years ago) started buying up a significant number of shares, bringing their total to 11.4% of the company. Often, this type of endeavor suggests a takeover offer for the remaining shares may soon follow. In order to beguile remaining shareholders to tender their shares, a takeover offer will ordinarily be at a price well above the current share price. Because the market anticipates an offer, the shares tend to trade privileged than they otherwise would. Excellent for current shareholders, aptly? It was, until a “Shareholder Rights Plot” was adopted by management (management’s description of how the plot works is available here).

The plot makes it more hard for a group to successfully bid for and buy the company. But even if an offer is made, shareholders are under no obligation to accept it. If they deem the offer to be unfair, they have the option to reject it. So essentially management is eliminating that shareholder option with a shareholder “rights” plot, forcing shareholders to wait until the next annual general meeting to vote the plot down.

In Wellbeing Analysis, Ben Graham asserts that shareholders do not protect themselves from managements as much as they should. This appears to be an example where management has protected itself at the expense of shareholders. Beware the Shareholder “Rights” Plot…it is usually designed to protect management, not shareholders.

Disclosure: Instigator has a long position in shares of LCAV

This article was written by Saj Karsan of Barel Karsan. If you loved this article, please vote for it by clicking the Buzz Up! button below.

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