What is a Suicide Pill
A suicide pill is a defensive strategy by which the target of a hostile takeover engages in activities that drive it into bankruptcy rather than allowing the merger to take place. Suicide pills are extreme actions that differ from situation to situation, and may result in the breakup or dissolution of the company. In these rare cases, the company's directors believe that their best defense to a hostile takeover is to cease operations or be placed under the protection of a bankruptcy court.
Also known as the "Jonestown Defense," after the cult that committed mass suicide by poisoning in Guyana in 1978.
BREAKING DOWN Suicide Pill
The suicide pill defense can be viewed as an extreme version of the poison pill. Such a defense is most often implemented in situations where a competitor attempts a hostile takeover of a firm, and the target's management or current ownership, viewing the takeover as a forgone conclusion, would prefer the company cease to exist than see the firm fall into outside hands. Taking on excessive debt would be one form of a suicide pill. Most often, suicide pill measures are adopted by smaller companies where the board of directors believe that a takeover by a competitor would mean the end of the business or result in irreparable harm to an ongoing business plan.
Another Example of a Suicide Pill
For example, company XYZ may decide that an unwanted bid from archrival company UVW is a thinly disguised attempt to gain access to its key patents, technology, or employees. The board of the takeover target may be convinced that their enterprise will simply be closed after the acquirer cherry-picks its best assets and people. Rather than allow that to happen, the company decides to adopt measures that will make the takeover impossible. Such steps include giving existing shareholders the right to receive an outsized number of new shares in the event of a takeover, or taking on debt that it lacks the ability to repay. Or, for example, a board trying to stave off a takeover could declare a special dividend that depletes its working capital to an extent that its operations can no longer be funded.
Whether suicide pills are good for shareholders or corporate governance is open to debate. Shareholders of the targeted company may argue that they had no say in the matter. They may complain that the value of their shares have been destroyed and the directors of the company are being unjustly enriched.