Loading the player...

What is a 'Poison Pill'

A poison pill is a tactic utilized by companies to prevent or discourage hostile takeovers. A company targeted for a takeover uses a poison pill strategy to make shares of the company's stock unfavorable to the acquiring firm.

BREAKING DOWN 'Poison Pill'

The term poison pill is the common colloquial expression referring to a specially designed shareholder rights plan.

There are two types of poison pills:

1. A “flip-in” permits shareholders, except for the acquirer, to purchase additional shares at a discount. This provides investors with instantaneous profits. Using this type of poison pill also dilutes shares held by the acquiring company, making the takeover attempt more expensive and more difficult.

2. A “flip-over” enables stockholders to purchase the acquirer’s shares after the merger at a discounted rate. For example, a shareholder may gain the right to buy the stock of its acquirer, in subsequent mergers, at a two-for-one rate.

History and Functionality of Poison Pill

In regard to mergers and acquisitions, poison pills were initially constructed in the early 1980s. They were devised as a way to stop bidding takeover companies from directly negotiating a price for the sale of shares with shareholders and instead force bidders to negotiate with the board of directors.

Shareholder rights plans are typically issued by the board of directors in the form of a warrant or an option attached to existing shares. These plans, or poison pills, can only be revoked by the board. Of the two types, the flip-in variety is the most common.

Poison Pill Example

Flip-in poison pills may hold an attached option that permits shareholders to buy additional discounted shares if any one shareholder buys more than a certain percentage, or more, of the company’s shares. For example, a flip-in poison pill plan is triggered when a shareholder buys 25% of the company’s shares. When it is triggered, every shareholder, excluding the holder who purchased 25%, is entitled to buy a new issue of shares at a discounted rate. The greater the number of shareholders who buy additional shares, the more diluted the bidder’s interest becomes and the higher the cost of the bid. If a bidder is aware such a plan could be activated, it may be inclined not to pursue a takeover without board approval.

RELATED TERMS
  1. Flip-Over Poison Pill

    A flip-over poison pill is a defensive strategy used to fight ...
  2. Voting Poison Pill Plan

    An anti-takeover strategy in which the company being targeted ...
  3. People Poison Pill

    A people pill is a defensive strategy to ward off a hostile corporate ...
  4. Suicide Pill

    A suicide pill is a defensive strategy by which a company trying ...
  5. Takeover

    A corporate action where an acquiring company makes a bid for ...
  6. Mergers and Acquisitions - M&A

    Mergers and acquisitions (M&A) is a general term that refers ...
Related Articles
  1. Investing

    Mergers and acquisitions: Understanding takeovers

    In the language of mergers and acqusitions, battleground terms meld with bizarre metaphors to create a unique vocabulary.
  2. Investing

    When Good News Is Actually Bad News For Investors

    Learn how investors can be on the lookout for companies that spin bad news for shareholders into good news. Watch out for these types of announcements.
  3. Investing

    Micron Technology Soars on Takeover Rumors

    Long-suffering Micron Technology (NASDAQ: MU) shareholders got a boost on Monday following its shareholder rights filing with the SEC on Friday. In what is often referred to as a "poison pill" ...
  4. Investing

    The Future of General Electric: The Red or Blue Pill?

    GE investors wonder what kind of impact new CEO John Flannery will have on the company's stock price.
  5. Small Business

    Starting a Business? Embrace the Discomfort

    There is a fine line between excitement and terror when starting a business. The key to success is finding comfort in the discomfort.
  6. Insights

    More Sanctions on Russia for Poisoning? Nope.

    More sanctions on Russia are unlikely even though a U.K. inquiry found that President Vladmir Putin probably ordered them. Here's why.
  7. Personal Finance

    Companies That Have Been Busted For False Claims

    If you think a company's claims sound too good to be true, it may only be a matter of time before the Federal Trade Commission catches on.
  8. Insights

    Tesla Reminds Customers Model S Is Its Best Vehicle

    In a blog post, the electric-car maker chose to fiercely defend its older flagship vehicle, rather than promote interest in its new Model 3.
  9. Small Business

    Governance Pays

    Learn about how the way a company keeps its management in check can affect the bottom line.
RELATED FAQS
  1. What can shareholders vote on?

    Understand the usual voting rights of common stock shareholders, along with the importance of shareholders exercising their ... Read Answer >>
  2. What happens to the shares of a company that has been the object of a hostile takeover?

    Learn about the effect on the share price of companies that are targets of hostile takeovers, which are tactics used by famed ... Read Answer >>
  3. How does a merger affect the shareholders?

    Explore the impact of a merger and understand how the process affects shareholders of the newly merged firm in terms of stock ... Read Answer >>
  4. Who is responsible for protecting and managing shareholders' interests?

    Several parties are supposed to be responsible for protecting and managing shareholders' interests, including the company's ... Read Answer >>
  5. What is the difference between a merger and an acquisition?

    Learn about the legal differences between a corporate merger and corporate acquisition – terms used when companies are either ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center