DEFINITION of 'Dead Hand Provision'

A dead hand provision, also known as a dead hand poison pill, is a special type of poison pill anti-takeover defense, in which the stock holdings of the bidder are massively diluted by shares being issued to every shareholder except them.

BREAKING DOWN 'Dead Hand Provision'

Dead hand provisions are used as a defense against hostile takeovers that are supported by the shareholders of the target company, by making the hostile takeover prohibitively expensive.

When a hostile bidder acquires a designated amount of the target company’s shares (typically 10% to 20%), rights automatically issue which allow all stockholders other than the bidder to buy newly issued shares at reduced prices, triggering a massive dilution of the value of the bidder’s holdings.

A hostile bidder can overcome a regular poison pill by launching a proxy contest to elect a new board of directors to redeem it. But dead hand provisions in shareholders rights plans bar anyone but the directors who adopted them from rescinding them. So, existing directors can prevent the acceptance of an unsolicited offer, regardless of shareholders’ wishes or the views of newly elected directors.

Dead hand poison pills are controversial and have been challenged in some jurisdictions. In 1998, the Delaware Supreme Court ruled that dead-hand redemption provisions in stockholder rights plans are invalid defensive measures as a matter of Delaware statutory law.

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