Duhaime's Law Dictionary


Poison Pill Plan Definition:

An anti-takeovers scheme by which financial disadvantages are triggered and targeted to discourage potential takeover acquirers.

In Revlon v MacAndrews, Justice Moore of the Supreme Court of Delaware wrote:

"A poison pill in the current language of corporate takeovers (is) a plan by which shareholders receive the right to be bought out by the corporation at a substantial premium on the occurrence of a stated triggering event."

Dawson, Pence and Stone wrote:

"The term poison pill generically refers to various defensive measures adopted by boards of directors in response to takeover attempts or in advance of possible takeover attempts that can cause severe economic repercussions in an acquirer or potential controlling person....

"Poison pills are generally not exercisable until the occurrence of specified triggering events such as a merger or other business combination with the issuer, the announcement or commencement of a tender offer for a specified percentage of the issuer's capital stock, or the accumulation of a specified percentage of the issuer's capital stock. The poison pill may exclude Acquiring Persons from the exercise of such rights."

In his 1989 article, Gordon Coleman wrote in the Canadian Journal of Business Law:

"A typical poison pill plan works as follows: A corporation distributes rights to acquire common shares. The rights trade with the common shares and have a life of 10 years but their "strike price" is sufficiently high (say, $100 compared to a $25 market price) to make them worthless. The rights carry no vote and are redeemable at a nominal amount by the board of directors before the poison pill provision is triggered and, in some cases, for a short period after the poison pill is triggered (to allow the board to negotiate an acceptable deal).

"A first generation poison pill ... is triggered upon the acquisition by a third party of 20% or more of the corporation's common shares or upon a take-over bid being made for 30% or more of the common shares.

"At that point, the rights separate from the common shares to which they were formerly attached, trade separately from them and become exercisable.

"Upon the further occurrence of a defined "merger event", the rights "flip-over" allowing the rights holders to purchase shares of the acquiror or the merged entity at half price. This is achievable only where a contract is entered into between the target and the acquiring company (such as a merger or sale of assets). Should the acquiring company attempt to avoid the "flip-over", for instance by engaging in defined "self-dealing" transactions which do not require a contract between the acquiring company and the target, then the rights holders, other than the acquiring company, are entitled to purchase stock of the target at half price (the "flip-in").

"In transactions where there is no merger event or self-dealing, there is no flip-over or flip-in. Accordingly, what has evolved is a second generation Pill in which a percentage-based flip-in feature is added. This provision allows the rights holders, other than the acquiror of a specified percentage (say, 20%) of the target's stock, to purchase shares in the target at a 50% discount upon the accumulation by the acquiror of the specified percentage (i.e., no self-dealing is required). Poison pill plans which include the percentage-based flip-in feature are now common because they give the Board an opportunity to negotiate an acceptable acquisition with a hostile acquiror which treats shareholders fairly and equally (i.e., the Board can redeem the Pill if a deal meeting these criteria is struck)."

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