Definition of Poison Pill Defense
What is a Poison Pill Defense
With a poison pill defense, provisions that are instituted have the objective of raising the cost of the acquisition to the acquirer to the point of making the acquisition prohibitively expensive. These provisions can be used as an anti-takeover measure by a target company to discourage an unsolicited and unwanted takeover attempt.
Here are a few different provisions that a target company could move forward on.
Preferred Share Issuance
In a preferred share issuance, the board may approve a preferred class of shares that grant extensive rights to existing shareholders. The preferred shareholder may generally exercise their rights in the event of a takeover offer or if a purported acquirer obtains a controlling block of shares.
Dual Class Recapitalization
In a dual class recapitalization, the board distributes a new class of equity to stockholders with superior voting rights but with inferior dividends or marketability. The new shares allow shareholders to exchange these shares for some multiple of ordinary common stock. This will increase the voting power of existing managers and make it more difficult for an acquirer to obtain a controlling block of shares.
Employee Stock Ownership Plan
An employee stock ownership plan may allow executives in an employee stock plan to vest at an accelerated rate. This will force the acquirer to purchase far more shares at a higher valuation.
Golden Parachute
A golden parachute consists of providing substantial benefits to top executives if the company is taken over by another firm and the executives are terminated as a result of the merger or takeover. Benefits may include stock options, cash bonuses and generous severance pay.
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Related Investment Terms
Black Knight
Hostile Takeover
White Knight
