Poison Pill

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Related to Poison Pill: dead hand poison pill, Poison Put

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 ?
decision to implement a poison pill within a relatively short period of
Through the settlement, shareholders have the guaranteed right to vote on the poison pill now, and on subsequent poison pills for the next twenty years.
Firms with poison pills were found to have lower Corporate Social Performance scores than firms without poison pills.
Some shareholders scored wholesale victories in their various public campaigns ranging from proxy contests to forcing companies to submit poison pills for approval.
Many commentators have argued that the adoption of a poison pill plan is, at most, a recapitalization of old common for new common -- or a stock swap -- and that the rights should not be treated as separate property prior to their becoming separately transferable and exercisable upon a triggering event.
2) The poison pill works by making a corporate takeover bid prohibitively expensive.
A poison pill works as a defense to a hostile takeover, triggering certain provisions upon the commencement of a takeover attempt.
Circuit City said its board and management reviewed the shareholder-rights plan after its most-recent annual meeting in June and determined that terminating the poison pill was "appropriate and responsive" to shareholder votes at the past two annual meetings.
The directors may conclude in the exercise Of their business judgment, after considering the pros and cons of the proposal, not to act as requested by the shareholders -- for example, not to redeem a poison pill.
The number of Fortune 500 firms with a poison pill doubled between 1985 and 1990 from one-third to nearly two-thirds.
Poison pills and other anti-takeover provisions may be useful roadblocks, but they can do little to stop a well-financed raider with an attractive offer for shareholders.
Voce has publicly urged shareholders to reject the Obagi poison pill for several months, arguing that it represented a desperate attempt by an entrenched Board to drive away significant acquisition interest.