Monday, December 3, 2007

What's a Poison Pill?

The term is employed so often in debates over corporate governance that we ought to be outfront here about just what it means.

A "poison pill" is a plan that increases the value of what existing shareholders are holding, when a potential acquirer accumulates more than a set amount of the equity.

Typically, such a by-law will provide that if one investor acquires more than, say, 10% of the company's equity, each of the other non-acquiring shareholders acquire the right to buy new stock at bargain prices. This dilutes the potential acquirer's holding, and requires that the acquirer pay more than it otherwise would in order to gain control of its target.

Company managements typically call them "shareholder rights plan," because that sounds better. Their effect upon most of the shareholders accorded these rights is probably negative, because if they deter potential acquirers from actually making such a move and passing the threshold they by definition lower the market demand for the stock.

Here's the URL for academic discussion of some of the issues that these provisions raise under Delaware law:

Sometimes the term "poison pill" is used more broadly for a range of anti-takeover measures. But I'll try to keep to the narrow, and thus the usefully specific, meaning of the term in my postings here. (Other measures with similar goals have equally colorful nicknames, like "shark repellent.")

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