• May 2019
    M T W T F S S
    « Apr    
     12345
    6789101112
    13141516171819
    20212223242526
    2728293031  

Poison Pill (“Shareholder rights plan”)

A defensive strategy that corporations use to discourage hostile takeovers and corporate raiders. Poison pills attempt to shield companies from hostile takeovers initiated by other companies, usually by making affected stock less of an attractive target. When successfully implemented, these strategies serve as an effective deterrent against hostile takeovers. When unsuccessfully implemented, they either do not deter takeovers or result in truly negative long-term consequences for the surviving company and its shareholders.

 

A poison pill strategy may manifest in any number of different ways. For example, some poison pill strategies are accomplished by enacting provisions that trigger prohibitively high costs that must be paid once a potential takeover is complete. Offering significant golden parachutes to executives that make the cost of running a company unattractive or allowing employee stocks to vest after the finalization of a takeover (leading to stock value dilution and an exodus of talent) can also work as poison pills. Other times, taking on a significant debt that renders a company overleveraged or offering preferred stock at a premium so profitable to the company that it makes the cost of taking over the company unmanageable can serve as successful poison pill strategies. Strategies that are particularly aggressive and extreme are sometimes referred to as suicide pills.

 

Please note that it is possible that a company would choose to embrace a poison pill strategy not to avoid acquisition but to drive up the cost of an acquisition and/or secure more favorable terms for a merger. Approaching a merger or acquisition in this way can be risky for a host of obvious reasons.

 

EXAMPLE:

Executive One: “I heard that some of the board members have been talking about initiating a Pac-Man poison pill strategy in an effort to prevent a takeover by that fine foods corporation.”

Executive Two: “Like… eat all the food while trying to avoid… ghosts?”

Executive One: (Stares) “…No.”