Definition: What is a Poison Pill Defense?

A poison pill defense, also known as a shareholder rights plan, is a strategy implemented by a company’s management to deter hostile takeovers or acquisitions. It is designed to give existing shareholders certain rights and privileges that make the acquisition less attractive or more difficult for the acquiring company.

How Does a Poison Pill Defense Work?

When a company adopts a poison pill defense, it typically issues rights or options to its existing shareholders. These rights are triggered when a hostile takeover attempt occurs, usually when an acquiring company acquires a certain percentage of the target company’s shares.

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Once triggered, the poison pill defense allows existing shareholders to purchase additional shares of the target company’s stock at a discounted price. This dilutes the acquiring company’s ownership stake and makes the acquisition more expensive and less desirable.

Types of Poison Pill Defenses

There are several types of poison pill defenses that companies can employ:

• Flip-in Rights: Existing shareholders have the right to purchase additional shares at a discounted price, making the acquisition more costly for the acquiring company.
• Flip-over Rights: Existing shareholders have the right to purchase shares of the acquiring company at a discounted price if a takeover occurs, allowing them to benefit from the potential upside of the acquiring company’s stock.
• Dead-hand Rights: These rights can only be redeemed by the existing board of directors, preventing a new board from redeeming them and making it more difficult for a hostile takeover to succeed.
• Poison Put: Existing shareholders have the right to sell their shares back to the company at an inflated price if a takeover occurs, making the acquisition financially unattractive.

See also How does a hostile takeover affect employees of the target company?

Benefits and Drawbacks of Poison Pill Defenses

The main benefit of a poison pill defense is that it gives the target company’s management more time and leverage to negotiate a better deal for shareholders. It can also discourage hostile takeovers that may not be in the best interest of the company or its shareholders.

However, poison pill defenses can also be seen as anti-shareholder since they can limit the ability of shareholders to accept a potentially lucrative offer for their shares. They can also entrench management and make it more difficult for shareholders to hold them accountable.

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Overall, the use of a poison pill defense is a strategic decision made by a company’s management and board of directors, weighing the potential benefits and drawbacks in the context of the company’s specific circumstances.

Keywords: company, poison, shareholders, rights, defense, existing, acquiring, shares, management