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Hostile Takeover Defense Strategies: Poison Pill

Hostile Takeover Defense Strategies: Poison Pill


Published by BSIC on 4 April 2021

Poison Pill

First on the list is the so-called “Poison Pill” which involves the current management of the target company in allowing current shareholders to purchase more shares in the case of a change in ownership. As more shares are issued, the Poison Pill dilutes the voting rights of the current shares and the potential acquirer would need to purchase more shares to reach 50% ownership, making the takeover harder and less attractive.

The word “poison pill” comes from the time of wars and espionage, when spies brought poison pills that could be swallowed to avoid detection. If they thought they were about to be captured, spies might take these drugs, similar to how a target company would use poison pills to prevent hostile takeovers.

Wachtell, Lipton, Rosen, and Kantz were the first to use this strategy. During a takeover battle in the 1980s, Martin Lipton invented the technique as a shield. His client, a firm called General American Oil, was in the sights of T. Boone Pickens. Martin Lipton instructed General American Oil’s board of directors to flood the market with new shares of the company’s stock, diluting the equity and making the purchase even more costly.

Various methods have progressed since Lipton’s use of the poison pill. The overall goal is to deter any outside takeover attempts by making the company less appealing or placing existing shareholders in a stronger position. Both of these objectives can be met by selling existing shareholders cheaper shares, thus diluting the future equity received by the acquirer and thus providing more equity to current shareholders.

The following three types of poison pill may be enacted:

Flip-in: Established shareholders will buy company shares at a discount under the flip-in strategy. This discount is often significant, enabling current shareholders to combine their equity claim in the company’s non-acquired part. This right to purchase is granted prior to the completion of the takeover or merger, and it is usually triggered when the acquirer reaches a certain ownership percentage threshold. The acquisition of discounted company stock dilutes the acquirer’s equity, lowering the value gained for the price paid. Since each share now owns a smaller portion of the corporation, all shareholders now have equal voting power on the board. Current shareholders (excluding the acquirer) would, however, have essentially centralized control as a result of the discounted stock acquisition.
Dead Hand: Once a certain number of shares have been purchased by the unwanted acquirer, new ones are automatically issued to every other existing shareholder, leading the aspiring owner’s stock holdings, or percentage of ownership in the company, to become massively diluted. Although earlier court rulings prohibited the use of dead hand and no hand pills, more recent rulings have upheld their use.
No hand (slow hand): Shareholder rights plan that prevents any member of a newly elected board from redeeming the rights to permit a takeover, if the majority of the new board is nominated or supported by the hostile bidder.

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