Stock rights are options given to shareholders to
purchase additional shares, usually at a discounted price, and with a
ten-year expiration date. Normally, the distribution is 15% or less of the
total shares outstanding and is granted only if certain predetermined
conditions are met.
Such plans are usually designed by the board of
directors of a company to prevent hostile takeover attempts. They make it
more expensive for an acquirer to takeover a company without the target’s
board of directors’ approval.
When the plan is first approved, the rights are
attached to the common stock. They are not exercisable, however, nor can
they be traded separately, unless certain conditions are met. These
conditions normally require an outside party to acquire about 15% of the
ownership of the company before the rights become activated. The board of
directors may also retain the right to cancel or change the plan at any
time, even after the conditions are met.
Stock rights are really a hindrance to the
shareholders, giving the board of directors of a company more power and
control over takeovers than they are entitled to. This makes it harder for
an acquiring company to solicit the stockholders directly, and to bypass the
board of directors.
There are also companies that distribute stock rights
to shareholders, which are separately traded on the exchanges. Normally,
stock rights are non-taxable until the rights or the stocks are sold.
Contact the company and the IRS for specific tax instructions.