Poison Pill: A Strategic Defense, But Not Quite A Magic Pill
May 2, 2022
Elon Musk’s attempt to take over Twitter was met with resistance from Twitter’s board, which attempted to wrest back some control of the negotiations by adopting a “poison pill”. But what exactly is a “poison pill”?
Poison pills, also known as shareholder rights plans, are a defense mechanism to preclude a hostile takeover, or at least give the target company greater negotiating leverage in the transaction. Oftentimes included in a company’s bylaws or charter, or existing as a contract among shareholders, a poison pill sets as a threshold a certain percentage of shares, and when someone’s stake in the company exceeds that threshold (without approval of the board), the other shareholders are allowed to purchase additional shares at a discount, effectively diluting the value of each individual share and making it more expensive to take over the company. In Twitter’s case, for example, when a shareholder accumulates a 15% stake without board consent, other shareholders are given the right to pay $210 for one-thousandth of a share of Twitter preferred stock for each share of Twitter common stock they hold. Each share of preferred stock confers voting rights and is worth twice the purchase price at $420. Consequently, if activated, the poison pill would have diluted Musk’s stake in the company and forced him to pay a much higher premium to continue with his acquisition plans.
Poison pills aren’t exactly magic pills that guarantee preventing hostile acquisitions, however. Even though poison pills can be adopted quickly, they don’t last forever. Twitter’s poison pill, for instance, expires in one year. There could also be limits on the number of shares a company can issue. Perhaps more importantly, existing shareholders and the purchaser could sue the company’s board for violating fiduciary duties in adopting the poison pill. A hostile purchaser can also theoretically circumvent the poison pill through soliciting proxies, which essentially requires the purchaser to win the hearts of other shareholders by convincing them to vote, together with the purchaser, to oust the company board or make other changes to the company desired by the purchaser. Despite its potential drawbacks, the poison pill defense can still effectively buy more time for a company to evaluate a purchaser’s offer and create more leverage in compelling the purchaser to negotiate with the company and its board.