Poison Pill

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Poison Pill

A defensive strategy based on issuing special stock that is used to deter aggressors in corporate takeover attempts.

The poison pill is a defensive strategy used against corporate takeovers. Popularly known as corporate raiding, takeovers are hostile mergers intended to acquire a corporation. A takeover begins when a so-called aggressor tries to buy sufficient stock in another corporation, known as the target, to seize control of it. Target corporations use a wide range of legal options to deter takeovers, among which is the poison pill: a change in the company's stock plan or financial condition that is intended to make the corporation unattractive to the buyer. Despite its fanciful name, the poison pill does not destroy the target company. It is intended to affect the aggressor, which will be burdened with costs if it succeeds in its takeover. The strategy was widely adopted in the 1980s.

The poison pill is unique among anti-takeover strategies. At the simplest level, takeovers are about buying stock. Corporate raiders offer shareholders an inflated price for their shares. They try to buy the company for more than its stock is worth. Although this idea seems paradoxical, raiders can reap profits from their overpriced acquisition by selling off its divisions and assets. Some anti-takeover strategies try to deter the aggressor by selling off prize assets first, making a counter offer to shareholders, or stipulating that the current executives will receive huge payoffs after a takeover when they are fired. These strategies can injure the company or simply benefit executives. But the poison pill involves a kind of doomsday scenario for the aggressor. If the takeover is successful, it will end up paying enormous dividends to the company's current stockholders.

Essential to the use of such a strategy is that it is first established in the corporation's charter. Among other details, these charters specify shareholders' rights. They specify that companies can issue preferred stock—shares that give special dividends, or payments—to their holders. When a takeover bid begins, the company's board of directors issues this preferred stock to its current shareholders. The stock is essentially worthless and is intended to scare away the aggressor. If the takeover succeeds, the stock becomes quite valuable. It can then be redeemed for a very good price or it can be converted into stock of the new controlling company—namely, the aggressor's. Both scenarios leave the aggressor with the choice of either buying the stock at a high price or paying huge dividends on it. This is the pill's poison.

Poison pill defenses are popular but somewhat controversial. The majority of large U.S. companies had adopted them by the 1990s. Part of this popularity comes from their effectiveness in delaying a corporate takeover, during which time a target company may marshal other defenses as well. Another reason is that courts have upheld their legality. One of the first important cases in this area reached the Delaware courts in 1985 (Moran v. Household International, Inc., 500 A.2d 1346). However, some critics have argued that the strategy gives company directors power at the expense of shareholders. They maintain that it can limit shareholders' wealth by thwarting potentially beneficial takeovers and allowing bad corporate managers to entrench themselves. In the 1990s such arguments spurred some investors to attempt to repeal poison pill provisions in corporate charters.

Further readings

Animashaun, Babatunde M. 1991. "Poison Pill: Corporate Antitakeover Defensive Plan and the Directors' Responsibilities in Responding to Takeover Bids." Southern University Law Review 18 (fall).

Hancock, William A. ed. 2000. Special Study for Corporate Counsel on Poison Pills. Chesterland, Ohio: Business Laws, Inc.,

Wingerson, Mark R., and Christopher H. Dorn. 1992. "Institutional Investors in the U.S. and the Repeal of Poison Pills: A Practitioner's Perspective." Columbia Business Law Review.


Golden Parachute; Mergers and Acquisitions.

References in periodicals archive ?
April 24 /PRNewswire-FirstCall/ -- ENERGY WEST, INCORPORATED , a natural gas, propane and energy marketing company, announced that it has executed an agreement that will have the effect of terminating its Preferred Stock Rights Agreement and its preferred stock purchase rights thereunder on May 25, 2007.
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Some of the key features of the new shareholder rights agreement include: a 20 percent threshold for triggering events; a requirement that Synovis shareholders ratify the rights agreement at the next annual meeting; a three-year independent director evaluation provision (commonly known as a "TIDE" provision); and a shareholder redemption feature allowing shareholders to vote at a special meeting that would be called to consider qualified offers.
Among other things, the termination of the registration rights agreement would eliminate the Company's obligation to offer to exchange the Notes for publicly registered notes.
The Rights Agreement was adopted by the WebMD Board on November 2, 2011 to guard against inadequate or coercive takeovers and other tactics that might be used in an attempt to gain control of the company without paying all stockholders a fair price for their shares.
Provider of overnight air freight service Air T Inc (NASDAQ Capital Market:AIRT) on Monday announced that its board of directors has adopted a Rights Agreement.
After rebuffing Pier 1 Imports' acquisition offer, Cost Plus has approved the renewal of its preferred shares rights agreement, also known as "a poison pill," through June 30, 2013.
NASDAQ: MLNK) today announced that its Board of Directors has adopted a Stockholder Rights Agreement (the "Rights Agreement") in which one preferred stock purchase right will be distributed for each share of common stock held by stockholders of record as of the close of business on April 2, 2012 (the "Rights").
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The Restated Rights Agreement amends and restates an original Rights Agreement dated as of May 29, 2001 to among other things: amend and otherwise adjust the Rights issued pursuant to the original agreement such that a single Right is, as of the restatement date, associated with each share of the Company's common stock and extend the final expiration date for the Rights by ten years to May 29, 2021.