What is a “Poison Pill”?

As promised, here is a post about what is referred to as a “poison pill.”  Takeover jargon is filled with fun terms like “poison pill” and “white knight” and “shark repellent.”   These terms are so colorful mostly because they describe boring contractual provisions and esoteric corporate governance concepts.  A “poison pill” is formally known as a “shareholder rights plan” which allows shareholders certain rights in the case of an unsolicited offer.

Under the shareholder rights plan, where a buyer tries to directly solicit shareholders, the target’s board can exercise the rights plan in a couple of ways: 1) in a “flip-in” event, shareholders have the right to receive, a number of shares of Common Stock that have a Current Market Price equal to two times the exercise price of the Right; and/or 2) a “flip-over” event which at the time the new bidder would have to grant stockholders double their stock value in equity of the new company.

Thus, any offer for a target is basically worthless, because a company cannot take control without paying an excessive amount of cash or equity for the target therefore “swallowing a poison pill.”  The board has discretion to keep or dissolve the pill, so the buyer’s best option is to negotiate with the target board.  That’s the point of having a poison pill.