Legal Definitions - poison pill

A poison pill is a defensive strategy employed by a company to prevent an unwanted acquisition, often referred to as a "hostile takeover." It is designed to make the target company significantly less appealing or much more expensive for the acquiring party, thereby deterring the takeover attempt. This defense typically involves granting existing shareholders the right to purchase additional shares at a deeply discounted price, or issuing special preferred shares with unique benefits, which would dilute the ownership stake of the hostile bidder and dramatically increase the cost of acquiring the company.

• Example 1: Diluting Ownership to Increase Cost

  Imagine a rapidly growing software company, CodeFlow Inc., is targeted by a larger competitor, GlobalTech Solutions, in a hostile takeover bid. To defend itself, CodeFlow's board activates a poison pill. This pill grants all existing CodeFlow shareholders (excluding GlobalTech) the right to purchase two new shares for every one they currently own at a significantly reduced price, but only if GlobalTech acquires more than 15% of CodeFlow's stock. If GlobalTech continues its takeover attempt, it would suddenly find its ownership stake severely diluted, and the cost to acquire a controlling interest would skyrocket, making the takeover prohibitively expensive.

• Example 2: Creating Undesirable Financial Obligations

  Consider GreenEnergy Corp., a renewable energy firm facing an unsolicited takeover offer from MegaUtilities Holdings. GreenEnergy's board implements a poison pill stating that if MegaUtilities acquires 20% or more of GreenEnergy's shares, all other existing GreenEnergy shareholders will automatically receive a special dividend of preferred shares. These preferred shares come with superior voting rights and a guaranteed high annual payout, making GreenEnergy much more valuable to its current shareholders but a significant and ongoing financial burden for a new owner like MegaUtilities. This makes the target company less attractive by adding substantial future financial commitments.

• Example 3: Triggering Discounted Share Purchases

  Suppose a popular retail chain, UrbanStyle Boutiques, is the subject of a hostile bid from a private equity firm, Apex Capital. To thwart the takeover, UrbanStyle's board enacts a poison pill. This pill stipulates that if Apex Capital acquires 10% or more of UrbanStyle's shares, all other UrbanStyle shareholders gain the immediate right to purchase additional UrbanStyle shares at half their market price. This "flip-in" provision would instantly dilute Apex Capital's percentage ownership and force them to buy many more shares at a higher effective price to achieve their desired control, making the takeover financially unviable for Apex Capital.