A shareholder rights plan, colloquially known as a "poison pill", is a type of defensive tactic used by a
corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
's
board of directors
A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organiz ...
against a
takeover
In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to t ...
.
In the field of
mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
, shareholder rights plans were devised in the early 1980s as a way to prevent takeover bids by taking away a shareholder's right to negotiate a price for the sale of shares directly.
Typically, such a plan gives shareholders the right to buy more shares at a discount if one shareholder buys a certain percentage or more of the company's shares. The plan could be triggered, for instance, if any one shareholder buys 20% of the company's shares, at which point every shareholder (except the one who possesses 20%) will have the right to buy a new issue of shares at a discount. If all other shareholders are able to buy more shares at a discount, such purchases would dilute the bidder's interest, and the cost of the bid would rise substantially. Knowing that such a plan could be activated, the bidder could be discouraged from taking over the corporation without the board's approval, and would first negotiate with the board in order to revoke the plan.
The plan can be issued by the board of directors as an "
option" or a "
warrant" attached to existing shares, and only be revoked at the discretion of the board.
History
The poison pill was invented by
mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
lawyer
Martin Lipton
Martin Lipton (born June 22, 1931) is an American lawyer, a founding partner of the law firm of Wachtell, Lipton, Rosen & Katz specializing in advising on mergers and acquisitions and matters affecting corporate policy and strategy. From 1958–1 ...
of
Wachtell, Lipton, Rosen & Katz
Wachtell, Lipton, Rosen & Katz is an American law firm in New York City. The firm is known for corporate law, regularly handling large and complex transactions. On both a profit per lawyer, and profit per equity partner basis, it is the most p ...
in 1982, as a response to tender-based
hostile takeovers
In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to t ...
. Poison pills became popular during the early 1980s in response to the wave of takeovers by
corporate raid
In business, a corporate raid is the process of buying a large stake in a corporation and then using shareholder voting rights to require the company to undertake novel measures designed to increase the share value, generally in opposition to t ...
ers such as
T. Boone Pickens
Thomas Boone Pickens Jr. (May 22, 1928 – September 11, 2019) was an American business magnate and financier. Pickens chaired the hedge fund BP Capital Management. He was a well-known takeover operator and corporate raider during the 1980 ...
and
Carl Icahn
Carl Celian Icahn (; born February 16, 1936) is an American financier. He is the founder and controlling shareholder of Icahn Enterprises, a public company and diversified conglomerate holding company based in Sunny Isles Beach. Icahn takes l ...
. The term "poison pill" derives its original meaning from a
poison pill physically carried by various
spies
Spies most commonly refers to people who engage in spying, espionage or clandestine operations.
Spies or The Spies may also refer to:
* Spies (surname), a German surname
* Spies (band), a jazz fusion band
* Spies (song), "Spies" (song), a song by ...
throughout history, a pill which was taken by the spies if they were discovered to eliminate the possibility of being interrogated by an enemy.
It was reported in 2001 that since 1997, for every company with a poison pill which successfully resisted a hostile takeover, there were 20 companies with poison pills that accepted takeover offers. The trend since the early 2000s has been for shareholders to vote against poison pill authorization, since poison pills are designed to resist takeovers, whereas from the point of view of a shareholder, takeovers can be financially rewarding.
Some have argued that poison pills are detrimental to shareholder interests because they perpetuate existing management. For instance,
Microsoft
Microsoft Corporation is an American multinational technology corporation producing computer software, consumer electronics, personal computers, and related services headquartered at the Microsoft Redmond campus located in Redmond, Washing ...
originally made an unsolicited bid for
Yahoo!
Yahoo! (, styled yahoo''!'' in its logo) is an American web services provider. It is headquartered in Sunnyvale, California and operated by the namesake company Yahoo Inc., which is 90% owned by investment funds managed by Apollo Global Man ...
, but subsequently dropped the bid after Yahoo! CEO
Jerry Yang threatened to make the takeover as difficult as possible unless Microsoft raised the price to US$37 per share. One Microsoft executive commented, "They are going to burn the furniture if we go hostile. They are going to destroy the place." Yahoo has had a shareholders rights plan in place since 2001. Analysts suggested that Microsoft's raised offer of $33 per share was already too expensive, and that Yang was not bargaining in good faith, which later led to several shareholder lawsuits and an aborted proxy fight from
Carl Icahn
Carl Celian Icahn (; born February 16, 1936) is an American financier. He is the founder and controlling shareholder of Icahn Enterprises, a public company and diversified conglomerate holding company based in Sunny Isles Beach. Icahn takes l ...
.
Yahoo's stock price plunged after Microsoft withdrew the bid, and Jerry Yang faced a backlash from stockholders that eventually led to his resignation.
Poison pills saw a resurgence of popularity in 2020 as a result of the
global coronavirus pandemic. As stock prices plummeted due to the pandemic, various companies turned to shareholder rights plans to defend against opportunistic takeover offers. In March 2020, 10 U.S. companies adopted new poison pills, setting a new record.
The
Twitter
Twitter is an online social media and social networking service owned and operated by American company Twitter, Inc., on which users post and interact with 280-character-long messages known as "tweets". Registered users can post, like, and ...
Board of Directors unanimously enacted a shareholder rights plan in 2022 following an unsolicited purchase offer from
Elon Musk
Elon Reeve Musk ( ; born June 28, 1971) is a business magnate and investor. He is the founder, CEO and chief engineer of SpaceX; angel investor, CEO and product architect of Tesla, Inc.; owner and CEO of Twitter, Inc.; founder of The Bori ...
.
Overview
In publicly held companies, there are various "poison pill" methods to deter
takeover
In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to t ...
bids. Takeovers by
soliciting proxies against the board or by acquiring a controlling block of shares and using the associated votes to get elected to the board. Once in control of the board, the bidder can manage the target. Currently, the most common type of takeover defense is a shareholder rights plan. Because the
board of directors
A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organiz ...
of the company can redeem or otherwise eliminate a standard poison pill, it does not typically preclude a
proxy fight
A proxy fight, proxy contest or proxy battle (sometimes even called a proxy war) is an unfriendly contest for the control over an organization. The event usually occurs when a corporation's stockholders develop opposition to some aspect of the corp ...
or other takeover attempts not accompanied by an acquisition of a significant block of the company's stock. It can, however, prevent shareholders from entering into certain agreements that can assist in a proxy fight, such as an agreement to pay another shareholder's expenses. In combination with a
staggered board of directors
Staggered elections are elections where only some of the places in an elected body are up for election at the same time. For example, United States senators have a six-year term, but they are not all elected at the same time. Rather, elections a ...
, however, a shareholder rights plan can be a defense.
The goal of a shareholder rights plan is to force a bidder to negotiate with the target's board and not directly with the shareholders. The effects are twofold:
* It gives management time to find competing offers that maximize the selling price.
* Several studies indicate that companies with poison pills (shareholder rights plans) have received higher takeover premiums than companies without poison pills. This results in increased shareholder value. The theory is that an increase in the negotiating power of the target is reflected in higher acquisition premiums.
Common types of poison pills
Preferred stock plan
The target issues a large number of new shares, often
preferred shares
Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt inst ...
, to existing shareholders. These new shares usually have severe redemption provisions, such as allowing them to be converted into a large number of common shares if a takeover occurs. This immediately dilutes the percentage of the target owned by the acquirer, and makes it more expensive to acquire 50% of the target's stock.
Flip-in
A "flip-in" permits shareholders, except for the acquirer, to purchase additional shares at a discount. This provides investors with instantaneous profits. Using this type of poison pill also dilutes shares held by the acquiring company, making the takeover attempt more expensive and more difficult.
Flip-over
A "flip-over" enables stockholders to purchase the acquirer's shares after the merger at a discounted rate. For example, a shareholder may gain the right to buy the stock of its acquirer, in subsequent mergers, at a two-for-one rate.
Back-end rights plan
Under this scenario, the target company re-phases all its employees' stock-option grants to ensure they immediately become vested if the company is taken over. Many employees can then exercise their options and then dump the stocks. With the release of the "golden handcuffs", many discontented employees may quit immediately after having cashed in their stock options. This poison pill is designed to create an exodus of talented employees, reducing the corporate value as a target. In many high-tech businesses, attrition of talented human resources may result in a diluted or empty shell being left behind for the new owner.
For instance,
PeopleSoft
PeopleSoft, Inc. is a company that provides human resource management systems (HRMS), Financial Management Solutions (FMS), supply chain management (SCM), customer relationship management (CRM), and enterprise performance management (EPM) softwar ...
guaranteed its customers in June 2003 that if it were acquired within two years, presumably by its rival Oracle, and product support were reduced within four years, its customers would receive a refund of between two and five times the fees they had paid for their PeopleSoft software licenses. While the acquisition ultimately prevailed, the hypothetical cost to Oracle was valued at as much as US$1.5 billion.
Voting plan
In a
voting plan A voting plan or voting rights plan is one of five main types of poison pills that a target firm can issue against hostile takeover attempts. These plans are implemented when a company charters preferred stock with superior voting rights to common ...
, a company will charter preferred stock with superior voting rights over that of common shareholders. If an unfriendly bidder acquired a substantial quantity of the target firm's voting common stock, it then still would not be able to exercise control over its purchase. For example,
ASARCO
Asarco LLC (American Smelting and Refining Company) is a mining, smelting, and refining company based in Tucson, Arizona, which mines and processes primarily copper. The company has been a subsidiary of Grupo México since 1999.
Its three larges ...
established a voting plan in which 99% of the company's common stock would only harness 16.5% of the total voting power.
In addition to these pills, a "dead-hand" provision allows only the directors who introduce the poison pill to remove it (for a set period after they have been replaced), thus potentially delaying a new board's decision to sell a company.
Constraints and legal status
The legality of poison pills had been unclear when they were first put to use in the early 1980s. However, the
Delaware Supreme Court
The Delaware Supreme Court is the sole appellate court in the United States state of Delaware. Because Delaware is a popular haven for corporations, the Court has developed a worldwide reputation as a respected source of corporate law decisions, ...
upheld poison pills as a valid instrument of takeover defense in its 1985 decision in ''
Moran v. Household International, Inc.'' However, many jurisdictions other than the U.S. have held the poison pill strategy as illegal, or place restraints on their use.
Canada
In Canada, almost all shareholders rights plans are "chewable," meaning they contain a permitted bid concept such that a bidder who is willing to conform to the requirements of a permitted bid can acquire the company by take-over bid without triggering a flip-in event. Shareholder rights plans in Canada are also weakened by the ability of a hostile acquirer to petition the provincial securities regulators to have the company's pill overturned. Generally, the courts will overturn the pill to allow shareholders to decide whether they want to tender to a bid for the company. However, the company may be allowed to maintain it for long enough to run an auction to see if a
white knight can be found. A notable Canadian case before the securities regulators in 2006 involved the poison pill of
Falconbridge Ltd.
Falconbridge Limited was a Toronto, Ontario-based natural resources company with operations in 18 countries, involved in the exploration, mining, processing, and marketing of metal and mineral products, including nickel, copper, cobalt, and plati ...
which at the time was the subject of a friendly bid from
Inco
Vale Canada Limited (formerly Vale Inco, CVRD Inco and Inco Limited; for corporate branding purposes simply known as "Vale" and pronounced in English) is a wholly owned subsidiary of the Brazilian mining company Vale. Vale's nickel mining and ...
and a hostile bid from
Xstrata
Xstrata plc was an Anglo-Swiss multinational mining company headquartered in Zug, Switzerland and with its registered office in London, United Kingdom. It was a major producer of coal (and the world's largest exporter of thermal coal), copper, ...
plc, which was a 20% shareholder of Falconbridge. Xstrata applied to have Falconbridge's pill invalidated, citing among other things that the Falconbridge had had its pill in place without shareholder approval for more than nine months and that the pill stood in the way of Falconbridge shareholders accepting Xstrata's all-cash offer for Falconbridge shares. Despite similar facts with previous cases in which securities regulators had promptly taken down pills, the
Ontario Securities Commission
The Ontario Securities Commission (OSC) is a regulatory agency which administers and enforces securities legislation in the Canadian province of Ontario. The OSC is an Ontario Crown agency which reports to the Ontario legislature through the Minis ...
ruled that Falconbridge's pill could remain in place for a further limited period as it had the effect of sustaining the auction for Falconbridge by preventing Xstrata increasing its ownership and potentially obtaining a blocking position that would prevent other bidders from obtaining 100% of the shares.
United Kingdom
In the United Kingdom, poison pills are not allowed under the
Takeover Panel
The Panel on Takeovers and Mergers, or more commonly The Takeover Panel, is the United Kingdom's regulatory body charged with the administration of The Takeover Code.
It was set up in 1968 and is located in London, England.
Its role is to ensu ...
rules. The rights of public shareholders are protected by the Panel on a case-by-case, principles-based regulatory regime. Raids have helped bidders win targets such as
BAA plc and
AWG plc
AWG plc was a British holding company which is parent to Anglian Water. It was previously listed on the London Stock Exchange, and was a member of the FTSE 250 Index, but it is now owned by the ''Osprey Consortium''. Its headquarters are in Huntin ...
when other bidders were considering emerging at higher prices. If these companies had poison pills, they could have prevented the raids by threatening to dilute the positions of their hostile suitors if they exceeded the statutory levels (often 10% of the outstanding shares) in the rights plan. The
London Stock Exchange
London Stock Exchange (LSE) is a stock exchange in the City of London, England, United Kingdom. , the total market value of all companies trading on LSE was £3.9 trillion. Its current premises are situated in Paternoster Square close to St Pau ...
itself is another example of a company that has seen significant stakebuilding by a hostile suitor, in this case the
NASDAQ
The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City. It is the most active stock trading venue in the US by volume, and ranked second ...
. The LSE's ultimate fate is currently up in the air, but NASDAQ's stake is sufficiently large that it is essentially impossible for a third party bidder to make a successful offer to acquire the LSE.
Takeover law is still evolving in continental Europe, as individual countries slowly fall in line with requirements mandated by the
European Commission
The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body o ...
. Stakebuilding is commonplace in many continental takeover battles such as
Scania AB
Scania AB is a major Swedish manufacturer headquartered in Södertälje, focusing on commercial vehicles—specifically heavy lorries, trucks and buses. It also manufactures diesel engines for heavy vehicles as well as marine and general indus ...
. Formal poison pills are quite rare in continental Europe, but national governments hold
golden shares In business and finance, a golden share is a nominal share which is able to outvote all other shares in certain specified circumstances, often held by a government organization, in a government company undergoing the process of privatization and tr ...
in many "strategic" companies such as telecom monopolies and energy companies. Governments have also served as "poison pills" by threatening potential suitors with negative regulatory developments if they pursue the takeover. Examples of this include Spain's adoption of new rules for the ownership of energy companies after
E.ON of Germany made a hostile bid for
Endesa
Endesa, S.A. (, originally an initialism for ''Empresa Nacional de Electricidad, S.A''.) is a Spanish multinational electric utility company, the largest in the country. The firm, a majority-owned subsidiary of the Italian utility company Enel, ...
and France's threats to punish any potential acquiror of
Groupe Danone
A group is a military unit or a military formation that is most often associated with military aviation.
Air and aviation groups
The terms group and wing differ significantly from one country to another, as well as between different branches ...
.
Other takeover defenses
Poison pill is sometimes used more broadly to describe other types of takeover defenses that involve the target taking some action. Although the broad category of takeover defenses (more commonly known as "shark repellents") includes the traditional shareholder rights plan poison pill. Other anti-takeover protections include:
*Limitations on the ability to call special meetings or take action by written consent.
*Supermajority vote requirements to approve mergers.
*Supermajority vote requirements to remove directors.
*The target adds to its charter a provision which gives the current shareholders the right to sell their shares to the acquirer at an increased price (usually 100% above recent average share price), if the acquirer's share of the company reaches a critical limit (usually one third). This kind of poison pill cannot stop a determined acquirer, but ensures a high price for the company.
* The target takes on large
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
s in an effort to make the debt load too high to be attractive—the acquirer would eventually have to pay the debts.
* The company buys a number of smaller companies using a
stock swap
In corporate finance a stock swap is the exchange of one equity-based asset for another, where, during the merger or acquisition, the swap provides an opportunity to pay with stock rather than with cash; see .
Overview
The acquiring company e ...
, diluting the value of the target's stock.
* Classified boards with staggered elections for the
board of directors
A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organiz ...
. For example, if a company had nine directors, then three directors would be up for re-election each year, with a three-year term. This would present a potential acquirer with the position of having a hostile board for at least a year after the first election. In some companies, certain percentages of the board (33%) may be enough to block key decisions (such as a full merger agreement or major asset sale), so an acquirer may not be able to close an acquisition for years after having purchased a majority of the target's stock. As of December 31, 2008, 47.05% of the companies in the S&P Super 1500 had a classified board. As of March 31, 2020, 27.1% of the companies in the S&P Super 1500 had a classified board.
Shareholder input
A minuscule number of companies are giving shareholders a say on poison pills. As of June 15, 2009, 21 companies that had adopted or extended a poison pill had publicly disclosed they plan to put the poison pill to a shareholder vote within a year. That was up from 2008's full year total of 18, and was the largest number ever reported since the early 1980s, when the pill was invented.
Effect
While there is some evidence that takeover protections allow managers to negotiate a higher purchase price, overall, they reduce firm productivity.
See also
*
Green mail
References
Notes
Bibliography
Articles
*
*
Books
*
Wachtell, Lipton, Rosen & Katz
Wachtell, Lipton, Rosen & Katz is an American law firm in New York City. The firm is known for corporate law, regularly handling large and complex transactions. On both a profit per lawyer, and profit per equity partner basis, it is the most p ...
, ''The Share Purchase Rights Plan'' in Ronald J. Gilson & Bernard S. Black, "The Law and Finance of Corporate Acquisitions" (2d ed. Supp. 1999)
* Ross, Westerfield, Jordan & Roberts, ''Fundamentals of Corporate Finance'' (6th ed. McGraw-Hill Ryerson) §23: "Mergers and Acquisitions"
{{DEFAULTSORT:Shareholder Rights Plan
Mergers and acquisitions
Metaphors referring to war and violence
Political terminology
Rights plan