What is Poison Pill?
481 reads · Last updated: December 5, 2024
A poison pill is a defense strategy used by the directors of a public company to prevent activist investors, competitors, or other would-be acquirers from taking control of the company. Poison pills are executed by buying up large amounts of its stock. They effectively block the accumulation of a company's outstanding shares.Companies promise to distribute additional free or heavily discounted shares to all existing shareholders, which dilutes the shares so outsiders can't take over the company by purchasing a controlling amount of shares.Another goal is to force the entity trying to acquire the company to negotiate with the company's board for a buyout price. Courts have upheld poison pills as a legitimate defense by corporate boards, which are not obligated to accept any offer they do not deem to be in the company's long-term interest.
Definition
A defensive board is a strategy employed by a publicly listed company's board to prevent aggressive investors, competitors, or other potential acquirers from taking control of the company. By purchasing a large amount of company stock, the defensive board effectively prevents the accumulation of circulating shares and dilutes shares by distributing additional free or heavily discounted stock to existing shareholders.
Origin
The concept of a defensive board originated in the 1980s during a period of frequent corporate takeovers. To protect companies from hostile takeovers, many began adopting this strategy. Courts have also ruled that defensive boards are a legitimate defense mechanism.
Categories and Features
There are mainly two types of defensive boards: poison pill plans and white knight strategies. Poison pill plans deter takeovers by diluting shares, while white knight strategies involve finding a friendly third party to acquire the company. The advantage of poison pill plans is their direct effectiveness, whereas white knight strategies may lead to better acquisition terms.
Case Studies
A typical case is Netflix's adoption of a poison pill plan in 2012 to thwart activist investor Carl Icahn's takeover attempt. By diluting shares, Netflix successfully protected itself from a hostile takeover. Another case is Yahoo's rejection of Microsoft's acquisition offer in 2008, using a defensive board strategy to force Microsoft to increase its bid.
Common Issues
Investors might worry that a defensive board could lead to shareholder value dilution. However, the strategy aims to protect the company from unfavorable takeover attempts. Another common misconception is that defensive boards are always beneficial for the company, but they can actually hinder potentially favorable acquisitions.
