Poison Pill
AdvancedA poison pill is a defensive tactic used by a company's board to make a hostile takeover more difficult or expensive, typically by allowing existing shareholders, other than the bidder, to buy additional shares at a discount if any party acquires more than a set percentage of the company.
The formal name for the most common type is a shareholder rights plan. It is usually triggered when a bidder acquires a stake above a threshold, often between 10% and 20%. All other shareholders can then buy new shares cheaply, greatly diluting the bidder's stake and making a takeover far more costly.
Poison pills were developed in the United States in the 1980s, during a wave of hostile takeovers, and are associated with lawyer Martin Lipton. They rarely need to be triggered: their existence forces bidders to negotiate with the board.
For example, a company facing an unwanted bid might adopt a rights plan, prompting the bidder to negotiate a higher price with the board rather than buying shares directly in the market.
Supporters argue poison pills give boards time to seek better offers. Critics argue they entrench management and prevent shareholders from accepting attractive bids. Their use varies by country; in the United Kingdom, the Takeover Code generally prevents boards from taking such defensive actions without shareholder approval.
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