What is the ‘Poison Pill’ Defence to a Hostile Takeover?

You may consider using a poison pill strategy as a company defending a hostile takeover. ‘Poison pills’ effectively deter corporate raiders from acquiring your company’s shares 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.

This article will explain the poison pill defence, how it works, and the main differences between a flip-in and flip-over strategy.

What are ‘Poison Pills’?

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. 

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 to the percentage they need to have a controlling stake. 

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. 

What Does A Poison Pill Defence Look Like?

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

Flip-In Poison Pill

You may choose to use a poison pill strategy in two ways. The first is a flip-in poison pill. 

The example in the section above is a flip-in poison pill. This is where your company discounts new shares that they offer to existing shareholders. Ultimately, your company will give existing shareholders the right to purchase shares with a discount before the takeover is complete. Usually, a shareholder rights plan will provide shareholders with the right to purchase shares. This will occur once the takeover bidder acquires shares beyond a specific threshold (for example, 10%). Furthermore, if a bidder is aware that you will activate this plan when they acquire shares beyond a certain point, they may choose not to acquire beyond that threshold. 

Flip-Over Poison Pill

A flip-over poison pill differs from a flip-in as this strategy will come into force once the takeover is complete. In contrast, the flip-in strategy will occur when a bidder acquires shares beyond a specified threshold. 

Ultimately, it is more common for a company to use a flip-in poison pill. Although, it would be helpful to note that both can effectively deter hostile takeovers. 

Negatives of the Poison Pill Defence

While this tactic can be an excellent way to fight a hostile takeover bid, you must understand that there can be negative consequences for current shareholders. The target company’s shareholders will have to buy the new shares to maintain their share percentage in the company. Although the shares will now be at a discount, not all shareholders will necessarily wish to buy them. 

Further, institutional investors may not wish to invest in a company if it has a very aggressive takeover defence strategy. Indeed, the poison pill strategy can sometimes assist bad management in maintaining power within a company. 

However, poison pill strategies have a high success rate in preventing a takeover without a company’s board approving the deal. 

Key Takeaways

As a company facing a potential hostile takeover, you may wish to consider using a poison pill defence. This is where your company uses a shareholder rights plan to issue additional shares to existing shareholders at a lower rate. In doing so, you will be diluting the shares in your company. Therefore, you can disincentivise corporate raiders, as they will be paying more money shares than they are receiving on their investment. Ultimately, it is always a good idea to seek professional legal advice and consult your company’s board sooner rather than later. 

If you are considering devising a shareholder rights plan, our corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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