In business, poison pills are often used to avoid takeover bids. These are attempts by a potential acquirer to obtain a controlling block of shares in a target company, and thereby gain control of the board and, through it, the company's management. There are several types of "poison pills" that can be planned by a company that thinks it may be the target of a takeover by a potential acquirer, but the conventional poison pill is now a shareholder rights plan.
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Shareholder Rights Plans
The target issues rights to acquire a large number of new securities, usually common stock or preferred stock, to existing shareholders. These new rights USUALLY allow holders (other than an acquirer) to convert the right into a large number of common shares if anyone acquires more than a set amount of the target's stock (typically 10-20%). This immediately dilutes the percentage of the target owned by the acquirer, and makes it more expensive to acquire control of the target. This form of poison pill is sometimes called a shareholder rights plan because it is intended to give management (and possibly shareholders) the right to approve an acquisition, potentially requiring the acquirer to pay a premium for control of the target. Because the board of directors of the company can redeem or otherwise eliminate a standard poison pill, it does not typically block or impede a proxy fight or other takeover not accompanied by an acquisition of a significant block of the company's stock.
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Other tactics
"Poison pill" is also used more broadly to describe other types of takeover defenses that involve the target taking some action that harms both target and bidder:
* The target adds to its charter a provision which gives the current shareholders the right to sell their shares to the acquirer at an increased price (usually 100 % above recent average share price), if the acquirer's share of the company reaches a critical limit (usually one third). This kind of poison pill cannot stop a determined acquirer but ensures a high price for the company.
* The target takes on large debts in an effort to make the debt load too high to be attractive - the acquirer would eventually have to pay the debts.
* The company buys a number of smaller companies using a stock swap, diluting the value of the target's stock.
* The target grants its employees stock options that immediately vest if the company is taken over. This is intended to give employees an incentive to continue working for the target company at least until a merger is completed instead of looking for a new job as soon as takeover discussions begin. However, with the release of the "golden handcuffs", many discontent employees may quit immediately after they've cashed in their stock options. This poison pill may create an exodus of talented employees. In many high-tech businesses, attrition of talented human resources often means an empty shell is left behind for the new owner.
* Peoplesoft guaranteed its customers in June 2003 that if it were acquired within two years, presumably by its rival Oracle Corporation, and product support were reduced within four years, its customers would receive a refund of between two and five times the fees they had paid for their Peoplesoft software licenses. The hypothetical cost to Oracle was valued at as much as US$1.5 billion. The move was opposed by some Peoplesoft shareholders who believed the refund guarantee flagrantly opposed their interests as shareholders. Peoplesoft allowed the guarantee to expire in April 2004.
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History
The poison pill was invented by noted M&A lawyer Martin Lipton of Wachtell, Lipton, Rosen & Katz, in 1982[1], as a response to tender-based hostile takeovers. Poison pills became popular during the early 1980s, in response to the increasing trend of corporate raids by businessmen such as Carl Icahn. Although the legality of poison pills was unclear for some time, they were upheld as a valid instrument of Delaware corporate law by the Delaware Supreme Court in its November 1985 decision Moran v. Household International, Inc.
It was reported in 2001 that since 1997, for every company with a poison pill that successfully resisted a hostile takeover, there were 20 companies with poison pills that accepted takeover offers.[2] The trend since the early 2000s has been for shareholders to vote against poison pill authorization, since, despite the above statistic, poison pills are designed to resist takeovers, whereas from the point of view of a shareholder, takeovers can be financially rewarding.
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Main types of business poison pill
* Preferred stock plan
* Flipover rights plan
* Ownership flip-in plan
* Back-end rights plan
* Voting plan
KEEPIN MY EYE$ ON THE PRIZE!
