{"id":4267,"date":"2022-06-23T02:10:41","date_gmt":"2022-06-23T01:10:41","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=4267"},"modified":"2022-07-01T07:14:39","modified_gmt":"2022-07-01T06:14:39","slug":"poison-pill-defence","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/corporations\/poison-pill-defence\/","title":{"rendered":"What is the ‘Poison Pill’ Defence to a Hostile Takeover?"},"content":{"rendered":"\n

You may consider using a poison pill strategy as a company defending a hostile takeover<\/a>. ‘Poison pills’ effectively deter corporate raiders from acquiring your company’s shares <\/a>beyond a certain point. Sometimes, companies may refer to this strategy as a shareholder rights plan. The strategy involves diluting the shares in your company. Often, an acquiring company will hold back on its hostile takeover attempt if the target company employs this strategy. <\/p>\n\n\n\n

This article will explain the poison pill defence, how it works, and the main differences between a flip-in and flip-over strategy.<\/p>\n\n\n\n

What are ‘Poison Pills’?<\/h2>\n\n\n\n

A poison pill plan is one way a company can defend against a hostile takeover. As the name suggests, a ‘poison’ pill aims to deter the potential acquirer from pursuing your company. <\/p>\n\n\n\n

Further, a hostile takeover is where a company tries to acquire a controlling shareholding in your company without the permission of your board. An acquiring company can buy out existing shareholders<\/a> to the percentage they need to have a controlling stake. <\/p>\n\n\n\n

Essentially, a poison pill plan involves issuing new shares in your company at a lower price to existing shareholders or the broader market. However, your company must not offer this lower price to the hostile bidder. Ultimately, the aim of doing this is to dilute the shares in your company. Therefore, offering shares at a lower price will result in a reduction in the returns per share that the hostile bidder will receive. Additionally, this strategy also has the effect of making it more expensive to complete the acquisition. <\/p>\n\n\n\n

What Does A Poison Pill Defence Look Like?<\/h2>\n\n\n\n

The original poison pill strategy, from the 1980s, would involve issuing a new share for every share that the hostile acquirer tried to buy. <\/p>\n\n\n\n

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For instance, imagine that your company has 1 million shares. A hostile bidder wishes to acquire a controlling share in your company without your board’s approval, starting with an acquisition of 9% of the shares in your company. To use a poison pill strategy, your company must pass a shareholder rights plan. When a bidder attempts to acquire more than 10% of the shares in your company, this plan will issue new shares at a lower rate.<\/p>\n

Moreover, consider the takeover bidder then acquires a further 11% of the shares in your company, which takes them up to 20%. Then, you would issue new shares (for example, 500,000 new shares), diluting the bidder’s shareholding. Now, instead of having a 20% holding, the takeover bidder would have 13% of the shares in your company. To get back to 20%, they would have to spend significantly more money on buying shares in your company. Furthermore, as you dilute the shares, the earnings per share will also decrease. This makes it less profitable to complete the acquisition.<\/p>\n<\/div>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\n

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