What Is a People Poison Pill?
A people poison pill is a defensive strategy designed to deter or prevent unwanted takeovers from happening. Once an unwelcomed approach is made to assume control of the target company, its management team reacts by signing a pact vowing to all resign if the deal somehow gets completed.
The people pill strategy is a variation of the poison pill defense.
- A people poison pill is one of several defensive strategies a company may pursue to prevent an unwanted takeover.
- The target company's management team threatens to all resign if a takeover it doesn't want goes ahead.
- If all the individuals responsible for the target company’s success quit, the acquirer may reconsider pursuing a deal.
- Such measures will only prove discouraging if the bidding party actually plans to keep the existing management.
Understanding a People Poison Pill
Acquisitions, the process where one company purchases control of another, occur all the time. Sometimes, the board of directors (B of D), a group of individuals elected to represent shareholders, will be happy to listen to bids. On other occasions, it may be completely against the idea of getting taken over and rebuff any proposals presented to it.
When faced with resistance, the interested party could either give up and move on or dig its heels in and engage in a fight. Should takeover advances turn hostile, companies have several tools at their disposal to safeguard their position and potentially prevent a deal from happening.
One of them is a people poison pill. A variation of the poison pill or shareholders’ protection rights plans, this strategy involves modifying the corporate charter and asking all key executives to resign in the event of a takeover.
If a private equity firm wants to take a failing public company private to improve its operations and profitability, then a people poison pill will not work, as current management will bring no added value.
The logic here is that if all the individuals responsible for the target company’s success quit, the acquirer may have second thoughts about still pursuing a deal. Of course, such measures will only prove discouraging if the bidding party actually plans to keep the existing management.
History of a People Poison Pill
The first use of the people poison pill anti-takeover strategy is attributed to the Borden Corporation. In 1989, the food company’s B of D approved a people poison pill, ensuring that any bidder who tried to take it over on the cheap or planned to fire somebody would be forced to deal with a potentially crippling exodus of all of Borden's key staff.
In exchange for signing contracts pledging to join the pact, Borden executives were promised a stock option grant and some received additional cash in their severance packages, called golden parachutes.
Types of Poison Pills
A people poison pill is just one type of poison pill: a category of anti-takeover measures tasked with making acquisition advances difficult to swallow and potentially deadly. Like most other takeover defenses, poison pills strive to reduce the desirability of the target company until corporate predators lose interest and go away.
Other forms of poison pills include:
- Suicide pill: The prey, as a last resort, engages in self-destructive measures to put off its suitor, favoring potential bankruptcy over the prospect of a takeover occurring.
- Flip-in poison pill: Shareholders, other than the acquirer, are offered the chance to buy additional stock in a company targeted for takeover at a discount, thereby diluting the value of the shares already purchased by the acquiring company.
- Poison put: The target company issues a bond that investors can redeem before its maturity date, thus increasing the cost a company will incur to acquire it.