Carefully explain 'poison pills' as an anti-takeover tactic.

Question

What will be an ideal response?

Answer 1

Poison pills, or shareholder rights plans, allow existing shareholders, under certain conditions, to have the option to buy additional shares at a discount to the current market price. This action is typically triggered when a new shareholder accumulates more than a set percentage of ownership, usually 20 percent. Managers fear that the new shareholder might be masterminding a takeover of the company. In the name of protecting existing shareholders, newly issued stock is offered at a steep discount to all shareholders except the alleged aggressor. As the existing shareholders buy the discounted shares, the stock is diluted significantly, since there are now more shares, each with a lower value. If there has been a takeover bid at a set price per share, the overall price offered for the company immediately goes up by a substantial amount, since more shares are now outstanding. This assures shareholders of receiving a high price for the company. Of course, the takeover bidder is aware of the poison pill provision and is likely to stop just short of accumulating shares beyond the trigger level. Senior management and the board will usually negotiate better terms before removing the poison pill. Often, however, the board will also negotiate to keep senior management and itself in place as part of the deal to remove the pill.