A poison pill is a defensive tactic used by a company to make itself a less lucrative bid as an anti-takeover measure. The poison pill usually takes the form of a clause in the company’s charter that allows shareholders to buy shares at a discount if the company is acquired. The poison pill makes the takeover less attractive to the acquirer because it would have to pay a higher price per share to get control of the company.
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What is a poison pill defense?
A poison pill defense is a strategy that intends to prevent hostile takeovers of businesses. The target company or business adopts versatile poison pills to save it from the unwanted control of any business or person.
History of poison pills in the business?
The poison pill defense was first used in the 1980s and has been used by several companies since then.
Martin Lipton of Wachtell, Lipton, Rosen & Katz introduced the poison pill concept in 1982 as a tool to handle hostile takeovers. Lipton was a mergers and acquisitions lawyer. The poison pill concept became popular during the early 1980s in fighting the wave of takeovers by corporate raiders like T. Boone Pickens and Carl Icahn.
Some companies have used the poison pill to fend off unwanted takeover attempts, while others have been unable to stop a hostile takeover despite having a poison pill in place.
What are poison pills called?
The poison pills are known as the “shareholder rights plans” formally. However, the concept is very common worldwide as a poison pill.
Criticisms of a poison pill defense
There are many criticisms of the poison pill defense.
Some argue that it can be used to entrench management and make it harder for shareholders to hold them accountable.
Others argue that the poison pill can block takeovers that would benefit shareholders.
The poison pill defense is a controversial tactic, but several companies have used it successfully to ward off unwanted takeover attempts.
What is the goal of a poison pill defense? A poison pill defense (also known as a defensive takeover) aims to prevent hostile companies from acquiring your company. For example, suppose your company is publicly-traded. You have control over the voting rights in the case of certain types of the hostile takeover — such as a takeover offer or an acquisition using a proxy (involving an investment bank and/or institutional investors). In that case, you will likely want to provide a poison pill defense. ”
Why are poison pills used?
Poison pills are used as a defensive tactic by a company to make itself less attractive to a hostile takeover bid. The poison pill usually takes the form of a clause in the company’s charter that allows shareholders to buy shares at a discount if the company is acquired. The poison pill makes the takeover less attractive to the acquirer because it would have to pay a higher price per share to get control of the company.
How does a flip-over poison pill work?
A flip-over poison pill is a type of poison pill that is triggered when a hostile bidder takes control of a portion of the company’s shares. Once the hostile bidder acquires this percentage, the poison pill is activated, and all shareholders can buy shares at a discount.
This makes the company less attractive to the hostile bidder, as they would have to pay a higher price per share to acquire the company. The poison pill is an effective way to prevent a hostile bidder from acquiring a company. It creates a situation where the hostile bidder must buy shares at a higher price per share than they would have paid if the company did not have this type of protection.
What is a poison pill price?
A poison pill price is per share that a hostile bidder would have to pay to acquire a company if a poison pill is in place. The poison pill price is usually set at a higher level than the current market price of the company’s shares, making the company less attractive to a hostile takeover bid. Poison pills are often used to maintain the company’s share price or prevent a hostile takeover that would significantly change the company’s management. They are usually employed when one party attempts to acquire shares in a company, which may create a conflict of interest.
Is a poison pill good for shareholders?
There is debate on whether or not poison pills are good for shareholders. Some argue that they can be used to entrench management and make it harder for shareholders to hold them accountable. Others argue that the poison pill can block takeovers that would benefit shareholders. Ultimately, the decision on whether or not a poison pill is good for shareholders depends on the specific circumstances of each case.
Types of Poison Pill Defenses
There are different poison pill defenses, each with its strengths and weaknesses. Let’s explore what are they, how they work, and examples.
Preferred stock plans were used as poison pills before 1984 to prevent a hostile takeover. The company would issue a dividend of preferred stocks to existing shareholders and allow voting rights. It usually made the entry challenging for hostile takeovers.
The Flip-in poison pill is a strategy used by target companies to discourage hostile takeovers by allowing existing stockholders to buy shares at a discount. The dilution prevents the new buyer from pursuing the deal.
The target company designs its employee stock-option plans to become effective at a higher price during an unwelcome bid. Thus, the acquiring company would not be able to quote a lower price for the shares. However, if the acquirer is ready to offer a very high price, the Back-end rights plan fails to prevent it. It is usually a process of delaying and hardly succeeds in encountering takeovers.
Golden handcuffs are incentives for key employees to stay with the company for long. However, they can work as an anti-takeover mechanism. When any hostile bid occurs, the critical staff becomes free from their golden handcuffs. It makes the acquirer less interested in taking over the company.
Target companies use the Super-voting rights plan to discourage hostile takeovers. When an investor obtains a large share block, preference shareholders get super-voting rights. As a result, the bulk share purchaser gets less voting rights and control over the company.
The Flip-over poison pill strategy encourages the target company’s shareholders to buy shares at a discounted rate in the acquirer’s company. As a result, it dilutes the acquirer’s company control and makes the takeover quite costly. The most common type of poison pill is the flip-over poison pill. A flip-over poison pill is a type of poison pill that is triggered when a hostile bidder takes control of a portion of the company’s shares. Once the hostile bidder acquires this percentage, the poison pill is activated, and all shareholders can buy shares at a discount. This makes the company less attractive to the hostile bidder, as they would have to pay a higher price per share to acquire the company.
Another type of poison pill is the poison pill that is triggered when a hostile bidder attempts to replace the company’s management after acquiring a part of the shares. This type of poison pill is designed to make it more difficult for the hostile bidder to take over the company by making it harder to replace the management.
The white knight poison pill is triggered when a white knight bidder tries to acquire the company. The white knight is typically a friendly company to the target company and is seen as a savior from the hostile bidder. The white knight poison pill allows the target company to sell itself to the white knight at a discount, making it less attractive for the hostile bidder to acquire the company. There are several other poison pills, but these are the three most common.
Pros and cons of Poison Pills
There are some advantages and disadvantages to using a poison pill defense.
Advantages
One advantage of using a poison pill is that it can give the target company time to find a white knight bidder. A white knight is a friendly company to the target company and is seen as a savior from the hostile bidder. The white knight can help the target company avoid being taken over by the hostile bidder.
Another advantage of using a poison pill is that it can make the target company less attractive to the hostile bidder. The hostile bidder would have to pay a higher price per share to acquire the company, making the takeover less attractive.
Disadvantages
One disadvantage of using a poison pill is that it can entrench management. The poison pill can make it difficult for shareholders to hold the administration accountable.
Another disadvantage of using a poison pill is that it can block takeovers that would benefit shareholders. The poison pill can make it more difficult for shareholders to sell their shares to the highest bidder.
Limitations of the Poison Pill Defense: What are the risks and limitations?
There are several risks and limitations associated with using a poison pill defense. One risk is that the poison pill can entrench management. The poison pill can make it more difficult for shareholders to hold the administration accountable.
Another chance is that the poison pill can block takeovers that would benefit shareholders. The poison pill can make it challenging for shareholders to offload shareholdings at the best price.
Another limitation of the poison pill is that it is only effective if shareholders approve of it. If the shareholders disapprove of the poison pill, the company may be forced to abandon it.
Finally, the poison pill is only effective if the company has enough cash to buy back the shares at a discounted price. If the company does not have enough cash, the poison pill will not be effective.
Is the Poison Pill Defense a viable strategy?
The poison pill defense is a controversial tactic, but several companies have used it successfully to ward off unwanted takeover attempts. The poison pill can make a company less lucrative to any hostile takeover bid.
Are Poison pills legal in the real world?
“The legality of poison pills had been unclear when they were first put to use in the early 1980s. However, the Delaware Supreme Court upheld poison pills as a valid instrument of takeover defense in its 1985 decision in Moran v. Household International, Inc.”
Poison pills in action
Let’s find some poison pills use cases in the real world over the last couple of years.
Papa John’s
In July 2018, the management of restaurant chain Papa John’s adopted the poison pill to prevent ousted founder John Schnatter from controlling the company. Schnatter owned 30% of the company’s stock. The price would go double if Schnatter and his affiliates acquires a stake in the company to 31%, or if anyone purchased 15% of the common stock without the board’s approval.
Netflix
In 2012, Netflix just days after Carl Icahn acquired a 10% stake stipulated that with any new acquisition of 10% or more, any Netflix merger, sales, or transfer of more than half of assets, allows for existing shareholders to get shares for half of the price.
In the middle of April 2022, the board of Twitter adopted the poison pill by offering existing stockholders the opportunity to buy stocks at discount to prevent Elon Musk from taking control as he hinted to buy at 54.20 a share. With the new provision, stockholders qualify for the discount if anyone buys more than 15% of outstanding shares. Elon already has a 9.1% stake in Twitter.
Conclusion
The poison pill defense is a controversial tactic, but it has been used successfully by many companies to ward off unwanted takeover attempts. The poison pill can make a company less attractive to a hostile takeover bid. Do you know about nudges in the business world?