Poison Pill
Quick Facts
- First used: 1982 (invented by attorney Martin Lipton)
- Legal status: Upheld in Delaware (Moran v. Household, 1985)
- Prevalence: ~80% of S&P 500 companies have one ready to deploy
A poison pill (formally called a shareholder rights plan) is a defensive tactic that allows existing shareholders to purchase additional shares at a discount if any single shareholder acquires more than a threshold percentage—typically 15-20%—of outstanding stock.
In Plain English
Think of a poison pill like a company's security system. It doesn't prevent burglars (hostile acquirers) from breaking in—but it makes the break-in so expensive they'd rather negotiate with the homeowner (the board) first.
How It Works
When a hostile acquirer crosses the ownership threshold, the poison pill is triggered. All shareholders except the acquirer receive rights to buy shares at a steep discount (often 50% off market price). This dilutes the acquirer's stake and makes the takeover prohibitively expensive.
Key Characteristics
- Trigger threshold: Usually 10-20% ownership
- Discount rate: Often 50% below market price
- Duration: Typically 1-3 years, but can be renewed
- Board control: Can be removed by the board to allow friendly deals
Famous Examples
Netflix (2012)
Activist investor Carl Icahn accumulated a 10% stake. Netflix adopted a poison pill with a 10% trigger to prevent a takeover.
Twitter (2022)
When Elon Musk disclosed a 9.2% stake, Twitter's board adopted a poison pill with a 15% trigger. Musk eventually negotiated a deal with the board at $54.20/share.
How Common Are They?
Most large public companies have either an active poison pill or a "shelf" poison pill they can deploy quickly. During the COVID-19 pandemic, many companies adopted pills with lower triggers (as low as 5-10%) to prevent opportunistic acquisitions while stock prices were depressed.
Effectiveness
Poison pills don't prevent takeovers—they force hostile acquirers to negotiate with the board rather than going directly to shareholders. Critics argue they entrench management; supporters say they ensure shareholders get fair value.
Legal Status
Upheld by Delaware courts in Moran v. Household International (1985). The decision established that boards can adopt poison pills without shareholder approval as part of their fiduciary duty to protect the company.
However, poison pills face increasing scrutiny from institutional investors who view them as anti-shareholder. Many companies now include sunset provisions or submit them to shareholder votes.
Practical Takeaways
For founders: A poison pill can protect you from opportunistic acquirers during tough times—but it won't stop a determined buyer forever. Think of it as a negotiating tool, not a permanent shield.
For investors: Watch for companies adopting pills with unusually low triggers (below 10%). This may signal management entrenchment rather than legitimate defense. Check if the pill has a sunset provision.
Related Reading
- White Knight — The friendly alternative when a hostile bidder attacks
- Proxy Fight — How activists gain control through shareholder votes
- Tender Offer — The direct approach to bypassing the board