Poison Pill
A poison pill is a defense strategy used by the directors of a public company to prevent activist investors, competitors, or other would-be acquirers from taking control of the company. Poison pills are executed by buying up large amounts of its stock. They effectively block the accumulation of a company's outstanding shares.Companies promise to distribute additional free or heavily discounted shares to all existing shareholders, which dilutes the shares so outsiders can't take over the company by purchasing a controlling amount of shares.Another goal is to force the entity trying to acquire the company to negotiate with the company's board for a buyout price. Courts have upheld poison pills as a legitimate defense by corporate boards, which are not obligated to accept any offer they do not deem to be in the company's long-term interest.
Definition: A defensive board is a strategy adopted by the board of directors of a publicly traded company to prevent aggressive investors, competitors, or other potential acquirers from taking control of the company. By purchasing a large amount of company stock, the defensive board effectively prevents the accumulation of the company's circulating shares and dilutes shares by distributing additional free or heavily discounted stock to existing shareholders, making it difficult for outsiders to acquire enough shares to take over the company.
Origin: The concept of a defensive board originated in the 1980s when corporate mergers and acquisitions were frequent, and many companies faced the risk of hostile takeovers. To protect the company from unfavorable acquisitions, boards began to adopt various defensive strategies, with the defensive board becoming a common and effective measure.
Categories and Characteristics: Defensive boards can be categorized into several types, including but not limited to:
- Poison Pill: The company distributes additional free or heavily discounted stock to existing shareholders, thereby diluting shares and preventing external takeovers.
- Golden Parachute: Provides generous severance packages to executives to increase the cost of acquisition.
- White Knight: Seeks a friendly company to acquire it to avoid a hostile takeover.
Specific Cases:
- Case 1: In 2000, a tech company faced the risk of a hostile takeover by a large competitor. The company's board quickly adopted a poison pill plan, distributing a large number of discounted shares to existing shareholders, making it impossible for the competitor to acquire enough shares to control the company. Eventually, the competitor abandoned the takeover plan.
- Case 2: In 2014, a pharmaceutical company received a takeover offer from an activist investor. The company's board initiated a golden parachute plan, providing generous severance packages to executives, increasing the cost of acquisition. After multiple negotiations, the activist investor eventually raised the acquisition price, resulting in higher returns for the company's shareholders.
Common Questions:
- Question 1: Does a defensive board harm shareholder interests?
Answer: The purpose of a defensive board is to protect the company's long-term interests, but it may cause short-term stock price fluctuations. The board needs to balance defensive strategies with shareholder interests. - Question 2: Is a defensive board legal?
Answer: Courts have ruled that a defensive board is a legal defense mechanism for a company's board of directors, and the board is not required to accept any offers they believe are not in the company's long-term interests.
