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.

Cross-references

Golden Parachute; Mergers and Acquisitions.

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The 2004 poison pill plan was to thwart John Malone and Liberty Media Corp.
this decision, the Commission adopted the view that poison pills, while
In fact, the BioClinica 10-K even explicitly states that the Poison Pill would "make it more difficult to replace or remove our current management team in the event our stockholders believe this would be in the best interest of our company.
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For this study, we concentrate on three types of antitakeover devices: fair-price and non-financial effects corporate charter amendments, which are approved by shareholders, and non-shareholder approved poison pills.
The 1999 proxy season saw the success of numerous bylaw amendments aimed at removing poison pills or allowing shareholders to vote on them.
In fact, poison pills generally are unrelated to the reorganization and are instead the result of corporate management's fear of unsolicited tender offers.
The IRS concluded the adoption of a poison pill plan would not be regarded as a distribution of either stock or property (a dividend) or any other event giving rise to the realization of gross income.
Resolution gives shareholders the right to approve the company's poison pill
The Board imposed the Poison Pill on shareholders without input, and has yet to provide a convincing justification for keeping it.
In practice, poison pills are almost never "triggered": the threat alone of activating them usually forces unwelcome bidders to negotiate with a company's board of directors (and, by extension, its managers) for control of the company.
The resolution, authored by shareholders John Gilbert and Frederick Eade, specifically directed Litton's management to ``resolve all potential conflicts'' within its bylaws in order to enact shareholder approval on poison pills.