Legal Definitions - pill

In a legal and corporate context, "pill" is typically an abbreviation for a Poison Pill.

A Poison Pill is a defensive strategy employed by a company to prevent or deter a hostile takeover. It grants existing shareholders the right to purchase additional shares at a significant discount, or to acquire shares in the acquiring company at a discount, if a single entity acquires a certain percentage of the target company's stock without board approval. This effectively dilutes the value of the acquiring company's stake, making the takeover prohibitively expensive and less attractive.

• Example 1: Deterring a Corporate Raider

  Imagine "InnovateTech," a publicly traded software company, becomes aware that a corporate raider, "AcquireAll Inc.," is quietly accumulating its shares with the intent of launching a hostile takeover. To protect itself, InnovateTech's board of directors implements a poison pill. This provision states that if AcquireAll Inc. acquires 15% or more of InnovateTech's stock without board approval, all other existing InnovateTech shareholders will automatically gain the right to buy two additional shares for every one they own at half the market price. This move would drastically dilute AcquireAll Inc.'s ownership percentage and make its investment significantly more expensive, thereby discouraging the takeover attempt.

• Example 2: Protecting a Niche Manufacturer

  "Precision Parts Co.," a specialized manufacturer with unique intellectual property, fears it might be vulnerable to a hostile bid from a larger competitor seeking to absorb its technology. To safeguard its independence, Precision Parts Co. adopts a poison pill. The terms specify that if any single entity acquires 20% of Precision Parts Co.'s outstanding shares, existing shareholders (excluding the acquiring entity) will be entitled to purchase shares of the combined company (if a merger occurs) at a substantial discount. This makes Precision Parts Co. a much less appealing target for an unsolicited acquisition, as the cost of the takeover would skyrocket for the bidder.

• Example 3: Preventing a "Creeping" Takeover

  A well-established retail chain, "Market Basket Inc.," notices that a rival, "MegaMart Holdings," is slowly buying up its stock on the open market, seemingly aiming for a controlling stake without making a formal offer. To prevent this "creeping" takeover, Market Basket Inc.'s board activates a poison pill. The pill is designed to trigger if MegaMart Holdings' ownership crosses a 10% threshold. Once triggered, it allows all other Market Basket Inc. shareholders to buy new shares at a deeply discounted price, effectively flooding the market with new stock and making it much harder and more expensive for MegaMart Holdings to achieve a majority stake.