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.

Glossary of Terms and Phrases

A financial dictionary or glossary is an essential tool to better understand the meaning of a specialized term or phrase. It would obviously make life much easier if everyone spoke the same language and used the same financial terms and phrases but that is not realistic.

We learn new languages to communicate with each other, transact business globally and to appreciate other cultures. Global finance is a specialized language that if understood and mastered, it will provide benefits that help to decrease risk and improve investment returns. Financial literacy is the foundation of developing good investment strategies and sound decision making.

Related Investment Terms

Black Knight

Hostile Takeover

White Knight