What Is a Flip-In Poison Pill?

A flip-in poison pill is a strategy used by a target company to prevent or discourage a hostile takeover attempt. This tactic allows existing shareholders, but not acquiring shareholders, to purchase additional stock in the company targeted for acquisition at a discount. Flooding the market with new shares dilutes the value of the shares already purchased by the acquiring company, reducing its percentage of ownership and making it harder and more costly for the buyer to gain control. It also enables investors who purchase the new shares to profit instantaneously from the difference between the discounted purchase price and the market price.

Key Takeaways

  • Flip-in poison pill is a strategy enabling shareholders, other than the acquirer, to buy additional stock in a company targeted for takeover at a discount.
  • Flooding the market with new shares dilutes the value of the shares already purchased by the acquiring company, deterring the buyer from crossing the ownership threshold.
  • The provision for a flip-in poison pill takeover defense can be found in the company’s bylaw or charter.
  • The rights to purchase occur only before a potential takeover and when the acquirer surpasses a certain threshold point of obtaining outstanding shares.

How a Flip-In Poison Pill Works

Flip-in poison pill provisions are often found in a company's charter or bylaws, a corporate document outlining how the organization is to be run, as a public display of their potential use as a takeover defense. This tells any company thinking about a hostile takeover that they will face difficulties.

The rights to purchase occur only before a potential takeover, and when the acquirer surpasses a certain threshold point of obtaining outstanding shares—typically between 20 to 50%. If the potential acquirer triggers a poison pill by accumulating more than the threshold level of shares, it risks discriminatory dilution in the target company.

The flip-in poison pill is generally triggered into action after an acquirer purchases between 20% and 50% of outstanding shares.

The threshold establishes a ceiling on the amount of stock any shareholder can accumulate before being required, for practical purposes, to launch a proxy contest.     

Limitations of a Flip-In Poison Pill

Companies cannot decide at whim whether to implement a flip-in poison pill or not. It can only be employed if it is in the company’s bylaws prior to the takeover.

Another important thing to bear in mind is that acquirers sometimes try to fight a flip-in poison pill in court. Sometimes they are successful and able to dissolve any program providing the deep discount.

Example of a Flip-in Poison Pill

In 2004, PeopleSoft employed the flip-in poison pill model to thwart Oracle Corporation's (ORCL) multi-billion hostile takeover bid.

At the time, Andrew Bartels, a research analyst for Forrester Research, said: "The poison pill is designed to make it more difficult for Oracle to take over the organization. The customer assurance program is designed to compensate customers should there be a takeover. It's a financial liability for Oracle."

Oracle attempted to pursue court dissolution of this program, and in December 2004, it succeeded with a final bid of approximately $10.3 billion.

Flip-in Poison Pill vs. Flip-Over Poison Pill

Another defense mechanism used against takeover candidates is a flip-over poison pill. This tactic gives existing shareholders the right to purchase the company's stock at a discounted price, thereby encouraging them to dilute its share price. These rights only go into effect when a takeover bid arises and can only be employed if it is included in the bylaws of the acquiring company.