We often hear the term “poison pill” being used in business and finance, but what does it actually mean? In this post, we’ll provide an in-depth look at poison pills and how they affect businesses around the world.
What Is a Poison Pill?
A poison pill is a legal term for a strategy used by companies to prevent takeover attempts from third parties. It is an anti-takeover tactic that can be enforced when a company fears an impending hostile corporate takeover. Poison pills most often take the form of shareholder rights plans and are designed to make a hostile takeover of the company unattractive to potential buyers.
How Do Poison Pills Work?
A Poison pill works by giving existing shareholders the right to buy more shares of the company at a discounted price, thus diluting the shares of any potential acquirer and making the takeover attempt more expensive or even unfeasible. This tactic is often used to delay takeover attempts so the company can find other ways to increase its share price or to attract other buyers.
Examples of Poison Pill Strategies
In a classic shareholder rights plan, the company issues special rights to existing shareholders that give them the right to purchase additional stock in the event of a hostile takeover. For example, if a potential acquirer purchases more than 10% of the company’s shares, the existing shareholders have the right to purchase more shares at a discounted price. In this way, the existing stockholders limit the potential acquirer’s control over the company.
Other poison pill strategies can involve giving shareholders additional voting rights or issuing warrants, which are contracts that give shareholders the right to purchase additional stock at a future date, usually at a discounted price. These tactics make it difficult for potential buyers to assume control of the company.
Conclusion: Poison Pills Can Help Protect Companies and Shareholders
Poison pills are effective tools for companies to protect themselves from hostile takeovers. They can help companies maintain their independence by making acquisitions more expensive and less attractive to potential buyers. While poison pills can help protect companies, they can also have significant consequences, so it’s important to weigh all of the pros and cons before putting one in place.