Poison Pill: A Corporate Defense Strategy

Overview

A poison pill, formally known as a shareholder rights plan, is a strategy employed by a company’s board of directors to fend off a hostile takeover attempt. It aims to make the target company less attractive or significantly more expensive to acquire.

Key Concepts

Poison pills work by triggering certain rights or provisions when an acquirer buys a specified percentage of the target company’s stock, usually between 10% and 20%. These provisions can include:

• Dilution: Issuing new shares to existing shareholders (excluding the acquirer) at a discount, thereby diluting the acquirer’s ownership stake and increasing the cost of acquiring control.
• Debt Increase: Triggering clauses that may increase the target company’s debt or make its existing debt more expensive.

Deep Dive

There are two primary types of poison pills:

Flip-In Pill

Allows existing shareholders, excluding the hostile acquirer, to purchase additional shares at a significant discount. This dilutes the acquirer’s ownership and voting power.

Flip-Over Pill

Grants shareholders the right to purchase shares of the acquiring company at a discount after a merger or acquisition is completed. This makes the post-merger entity less valuable.

Applications

Poison pills are a common tool in the corporate world for:

• Deterring hostile bids: Providing leverage for the board to negotiate better terms or reject unwanted offers.
• Protecting shareholder value: Giving the board time to explore alternatives or seek a higher price.

Challenges & Misconceptions

While effective, poison pills can be criticized for entrenching management and potentially preventing beneficial takeovers. They are not always foolproof and can be challenged in court.

FAQs

What is the primary purpose of a poison pill?

To prevent or discourage a hostile takeover by making the target company less attractive or more expensive to acquire.

Who implements a poison pill?

The board of directors of the target company.

Can a poison pill be overturned?

Yes, through legal challenges or by the board of directors deciding to redeem it.