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.

Cross-references

Golden Parachute; Mergers and Acquisitions.

References in periodicals archive ?
In the face of bidders' increasing success in circumventing the protections of the poison pill, companies began adopting "staggered boards" and "classified boards".
The rights plan had come under fire from a shareholder, Florida's Miramar Police Officers' Retirement Plan, which contended that since News had agreed in a 2006 settlement to limit poison pills to only one year without shareholder approval, the two-year life of the current pill exceeded the settlement.
that a poison pill may be allowed to stay in place for an extended
The key concept behind the poison pill is that it deters a potential acquirer from purchasing the stock of the target by making a takeover unprofitable.
In 2007, the board of WCI Communities followed a third course, employing a poison pill to block Carl Icahn's hostile tender offer.
A letter attached to the SEC filing requested that Tweeter's board of directors submit to its shareholders during the retailer's 2006 annual meeting a proposal to terminate its poison pill plan and eliminate a provision of its "certificate of incorporation that provides for a staggered board of directors.
Poison Pill Securities: Stockholder Wealth, Profitability, and Ownership Structure.
He is proposing a bylaw that would disqualify board members for an additional term if they failed to approve elimination of poison pill rights within 180 days after the passage of a stockholder resolution in favor of such action.
Shareholders approved the proposal ending the poison pill for the second year in succession, this time by a margin of one per cent.
His November 1998 announcement of a "Shareholder Franchise Bylaw" which would forbid a company from renewing its poison pill without shareholder approval, served as a model for other shareholders to emulate in the 1999 proxy season.
A second type of innovation that became popular later in the decade is the shareholder rights plan, or poison pill, adopted by boards of directors at a majority of large corporations during the second half of the 1980s.
8808081 in which the Internal Revenue Service held that "poison pill" stock rights were taxable boot in an otherwise tax-free reorganization, and (2) Revenue Ruling 90-11 in which the IRS discussed the federal income tax consequences of a corporation's adoption of a poison pill plan.