In the context of corporate governance and mergers and acquisitions, a poison pill is a defensive tactic used by a target company’s management to discourage or deter hostile takeover attempts. The purpose of a poison pill is to make the acquisition less attractive or financially unfavorable for the acquiring company. A poison pill typically involves the target company’s board of directors implementing a shareholder rights plan. The plan gives existing shareholders certain rights or benefits that are triggered when a hostile takeover attempt occurs. These rights are often in the form of special rights or additional shares of stock, which are granted to shareholders under specific circumstances.
Flip-In: One common type of poison pill is a “flip-in” provision. It allows existing shareholders, excluding the acquiring company, to purchase additional shares of stock at a significant discount when a hostile takeover is attempted. This dilutes the acquiring company’s ownership stake and makes the acquisition more expensive and less desirable.
Flip-Over: Another type is a “flip-over” provision, which enables existing shareholders to purchase shares of the acquiring company’s stock at a discounted price after the completion of a hostile takeover. This provision transfers the financial burden of the acquisition to the acquiring company and reduces the value of the deal for the acquirer.
By implementing a poison pill, the target company’s management aims to discourage potential acquirers, negotiate from a stronger position, and provide more time to explore alternative strategies or merger partners. Poison pills can act as a deterrent, as the financial implications and potential dilution of the acquiring company’s ownership can make a hostile takeover less appealing.