Poison Pill

A poison pill is a strategy used in corporate governance to resist an unwanted takeover or acquisition.

Definition:

A poison pill is a provision in a company’s bylaws or articles of association that gives the company’s management the power to take certain actions, such as issuing new stock, repururchasing stock, or granting options, in response to a hostile takeover attempt. These actions can make it more difficult or expensive for the acquirer to acquire the company.

Purpose:

• To deter hostile takeovers and prevent them from happening.
• To give the company’s management more time to negotiate a sale or find a suitable buyer.
• To protect the company’s interests and shareholder value.

Examples:

• Issuing new stock: This can dilute the acquirer’s ownership and make it more difficult for them to gain control of the company.
• Repurchase of stock: This can increase the company’s cash flow and make it more difficult for the acquirer to acquire the company.
• Granting options: This can dilute the acquirer’s ownership and make it more expensive for them to acquire the company.

Criticisms:

• Abuse of management power: Critics argue that poison pills can give management too much power and make it difficult for shareholders to protect their interests.
• Potential for higher costs: Poison pills can lead to higher costs for shareholders, such as increased legal fees and administrative fees.
• Misuse of poison pills: Critics argue that companies can misuse poison pills to fend off acquirers without any genuine intention of improving their company.

Conclusion:

Poison pills are a controversial corporate governance technique that can have both positive and negative effects. They are designed to deter hostile takeovers and protect shareholder value, but they can also lead to abuse and higher costs.