Poison Pill

Entry in progress—B.P.
   
Wikipedia: Shareholder rights plan
A shareholder rights plan, colloquially known as a “poison pill”, or simply “the pill” is a kind of defensive tactic used by a corporation’s board of directors against a takeover. In the field of mergers and acquisitions, shareholder rights plans were devised in the early 1980s as a way for directors to prevent takeover bidders from negotiating a price for sale of shares directly with shareholders, and instead forcing the bidder to negotiate with the board. Shareholder rights plans are unlawful without shareholder approval in many jurisdictions such as the United Kingdom, frowned upon in others such as throughout the European Union, and lawful if used “proportionately” in others including Delaware in the United States.
 
The typical shareholder rights plan involves a scheme whereby shareholders will have the right to buy more shares at a discount, if one shareholder buys a certain percentage of the company’s shares. The plan could be triggered, for instance, when any one shareholder buys 20% of the company’s shares, at which point every shareholder (except the one who possesses 20%) will have the right to buy a new issue of shares at a discount. The plan can be issued by the board as an “option” or a “warrant” attached to existing shares, and only be revoked at the discretion of the board of directors. A shareholder who can reach a 20% threshold will potentially be a takeover bidder. If every other shareholder will be able to buy more shares at a discount, such purchases will dilute the bidder’s interest, and the cost of the bid will rise substantially. Knowing that such plan could be called on, the bidder could be disinclined to the takeover of the corporation without the board’s approval, and will first negotiate with the board so that the plan is revoked.
 
Shareholder rights plans, or poison pills, are controversial because they hinder an active market for corporate control. On the other hand, giving directors power to deter takeovers puts directors in a strong position to enrich themselves, as the directors may have to be compensated for the price of consenting to a takeover.
   
History
The poison pill was invented by noted mergers and acquisitions lawyer Martin Lipton of Wachtell, Lipton, Rosen & Katz in 1982, as a response to tender-based hostile takeovers. Poison pills became popular during the early 1980s in response to the wave of takeovers by corporate raiders such as Carl Icahn. The term “poison pill” derives its original meaning from a poison pill physically carried by various spies throughout history, a pill which was taken by the spies when they were discovered to eliminate the possibility of being interrogated by an enemy.
 
It was reported in 2001 that since 1997, for every company with a poison pill which successfully resisted a hostile takeover, there were 20 companies with poison pills that accepted takeover offers.[1] The trend since the early 2000s has been for shareholders to vote against poison pill authorization, since poison pills are designed to resist takeovers, whereas from the point of a shareholder, takeovers can be financially rewarding.
 
Some have argued that poison pills are detrimental to shareholder interests because they perpetuate existing management. For instance, Microsoft originally made an unsolicited bid for Yahoo!, but subsequently dropped the bid after Yahoo! CEO Jerry Yang threatened to make the takeover as difficult as possible unless Microsoft raised the price to US$37 per share. One Microsoft executive commented, “They are going to burn the furniture if we go hostile. They are going to destroy the place.” Yahoo had had a shareholders rights plan in place since 2001.[2] Analysts suggested that Microsoft’s raised offer of $33 per share was already too expensive, and that Yang was not bargaining in good faith, which later led to several shareholder lawsuits and an aborted proxy fight from Carl Icahn.[3][4] Yahoo’s stock price plunged after Microsoft withdrew the bid, and Jerry Yang faced a backlash from stockholders that eventually led to his resignation.
     
Wiktionary: poison pill
Noun
poison pill (plural poison pills)
1.(business, politics) Any strategy designed to produce negative results for an entity carrying out a takeover.
 
Investopedia
What Does Poison Pill Mean?
A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills:
1. A “flip-in” allows existing shareholders (except the acquirer) to buy more shares at a discount.
2. A “flip-over” allows stockholders to buy the acquirer’s shares at a discounted price after the merger.
     
Free Merriam-Webster Dictionary
poison pill noun
Definition of POISON PILL
: a financial tactic or provision used by a company to make an unwanted takeover prohibitively expensive or less desirable
First Known Use of POISON PILL
1983
 
(Oxford English Dictionary)
poison pill n.  (a) a pill containing poison, esp. one taken in order to commit suicide; also fig.;  (b) Business (orig. U.S.), any of a number of ploys (such as a conditional rights issue) adopted by the victim of an unwelcome takeover bid to make itself unattractive to the bidder.
1835 W. L. Rede Affair of Honour v. 17   Perhaps I haven’t swallowed the *poison pill after all.
1906 B. Stoker Personal Reminisc. Henry Irving xlii. 371,  I had always a poison pill fastened here, where the lappet of my coat now is.
1975 Times 29 Aug. 6/8   There are many organizations working against Mrs Gandhi‥. Ours is serious‥. We all carry poison pills in our pockets.
1976 Times 1 Sept. 13/4   To sugar coat the poison pill administered to a gullible public.
1983 N.Y. Times 19 June iii. 14/4   Lenox played hard to get‥and implemented a novel anti-takeover devise [sic] to discourage Brown–Forman Distillers takeover bid. The move is called the ‘Poison Pill defense’.
2001 D. Lebaron & R. Vaitlingham in S. Crainer & D. Dearlove Financial Times Handbk. Managem. (ed. 2) 512   Senior executives may use such bizarre devices as ‘shark repellents’ and ‘poison pills’, which make it extremely costly for shareholders to replace the incumbent board of directors.
 
19 June 1983, New York (NY) Times, “Week in Business” by Nathaniel C. Nash, pg. F14:
Leonx played hard to get, as it granted eight of its executives “golden parachutes” and implemented a novel anti-takeover devise to discourage Brown-Forman Distillers takeover bid. The move is called the “Poison Pill defense,” and the china maker plans to declare a dividend of preferred stock that would stipulate that any acquirer of those shares offer Lenox shareholders its voting common stock, not just cash. Such a requirement would dilute the value of the shares held by Brown-Forman management.
 
29 June 1983, New York (NY) Times, “Distiller Wins Bid For Lenox” by Pamela G. Hollie, pg. D1:
Lenox Inc., after weeks of opposition, yesterday agreed to a takeover by the Brown-Forman Distillers Corporation after the distiller raised its bid by $3 a share.
(...)(Pg. D5—ed.)
Two meetings over the weekend failed to result in an agreement. Lenox was primarily concerned with increasing the offer, while Brown-Forman was primarily concerned with putting a stop to Lenox’s plan for a special preferred stock issue.
 
The issue, which became known on Wall Street as a “poison pill,” carried a specially designed “flip-over” provision that required any company acquiring Lenox to issue voting common stock in the acquiring company to Lenox shareholders. The effect of the issue would have been to dilute the Brown family’s 62 percent Brown ownership in Brown-Forman.