What is a Dead Hand Provision?

A dead hand provision is a defense mechanism supported by the shareholders of a target company to prevent against hostile takeover. It is also called a dead hand poison pill. Using this defense technique, a target company makes a hostile takeover expensive in such a way that the bidder cannot acquire the target company. A huge number of new shares are issued by the target company, the bidders stock holdings are also diluted (issued) to other shareholders except the bidder.

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How is a Dead Hand Provision Used?

A dead hand provision is an anti-takeover mechanism target at making hostile takeovers unreasonable expensive for hostile bidders. Under the dead hand provision, if a hostile bidder acquires a portion of the target company's shares, other shareholders of the target company are allowed to buy a huge number of new shares at reduced prices, this would in turn dilute the value of the stocks that the hostile bidder acquired making the takeover prohibitively expensive. In the case of a regular poison pill, if a hostile bidder launches a contest in proxy, requesting that new board of directors be elected in a target company, the defense mechanism can be overcome. Dead hand provisions however is also defensive against the replacement of existing board of directors. In certain cases, dead hand poison pills have been challenged due to the controversy attributable to how they are applied.

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