A poison pill, formally a shareholder rights plan, is a defensive measure that makes a company prohibitively expensive or dilutive to acquire without the board's consent. It is the best-known defense against a hostile takeover.

How it works

The board distributes rights to existing shareholders that are dormant until a bidder acquires more than a set trigger threshold of the company's stock — commonly around 10–20%. Once triggered, the rights let all shareholders except the hostile bidder buy additional shares at a steep discount, massively diluting the bidder's stake and voting power and raising the cost of the takeover.

Types

  • Flip-in — existing holders (other than the acquirer) may buy additional shares of the target at a discount, diluting the acquirer.
  • Flip-over — target shareholders may buy shares of the acquirer at a discount after a merger, diluting the acquirer's own stock.

Key features

  • It is adopted by the board without a shareholder vote, and can usually be put in place quickly.
  • The board can redeem the pill cheaply if it decides to welcome a bid — making the pill a tool to force a bidder to negotiate with the board rather than an absolute bar.

Origins and law

The poison pill was devised by lawyer Martin Lipton of Wachtell, Lipton, Rosen & Katz in the early 1980s. Its legality was upheld by the Delaware Supreme Court in Moran v. Household International (1985). Because pills entrench boards, their use is checked by fiduciary-duty standards and, in practice, by shareholder and proxy-adviser pressure. A related modern variant, the "NOL poison pill", is used to protect valuable tax attributes.

See also

  • Hostile takeover — An acquisition pursued against the wishes of the target company’s board.
  • Tender offer — A public offer made directly to shareholders to buy their shares, usually at a premium.
  • Acquisition — The purchase of one company, or its assets, by another that gains control.

References & further reading

  1. Investopedia — “Poison Pill”
  2. Corporate Finance Institute — “Poison Pill”
  3. Harvard Law School Forum on Corporate Governance — rights plans