Poison Pill Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Poison Pill, written in plain English, along with examples of how it is used.
What is Poison Pill?
It is an anti-takeover stretegy by the company which is in target for the hostile takeover. It is a fullly planned tactics whereby the company or firm offers its shareholder, the stocks at much lower price(below market price) that it becomes very expensive and unattractive for the shareholder to takeover the company.
History and Meaning of Poison Pill
A poison pill is a term used to refer to anti-takeover measures put in place by a company to make the company less attractive to potential acquirers during a hostile takeover. The term was first used in the early 1980s when Martin Lipton, a New York lawyer, helped form the takeover defense for the company American Express. This defense entailed offering existing investors the ability to purchase company shares at a reduced price, which increases ownership dilution hence making a takeover unfavorable to the acquirer.
A poison pill is not exclusive to just one tactic but instead encompasses several defense strategies. Some methods that a company can implement include the golden parachute, voting rights dilution or staggering boards, which are aimed at making the company less attractive. The poison pill approach is aimed at increasing the number of shares in circulation, hence diluting shareholder equity, thereby making it too expensive for the hostile party to take over the company.
Examples of Poison Pill
In 2020, The Walt Disney Company enacted a poison pill defense mechanism, which offered shareholders the chance to purchase additional shares at a discounted price if an individual shareholder had over 15% of the company.
In 1999, Xerox saw that a possible takeover attempt by Paulson & Co was in progress and enacted its poison pill, which distributed preferred shares to shareholders, entitling them to two votes per share, to dilute the ownership interests of the attackers.
In 2021, the food delivery company GrubHub proposed a poison pill as an anti-takeover defense mechanism. The poison pill defense was to be triggered if a single entity attained 10% or more ownership.
Legal Terms Similar to Poison Pill
Greenmail – A term that means a company seeks out a hostile acquirer and purchases the acquiring company's shares at a higher price than market value to avoid a takeover.
Shark Repellent - An antitakeover tactic utilized by corporations to prevent a hostile takeover attempt.
Voting Trusts - Voting trust agreements can confer legal control over the shares to the trustees to reduce the risk of a hostile takeover.