What is a “poisonous pill” defense?
On Friday, Twitter thwarted Elon Musk’s offer to buy the company for over $ 43 billion with a business tool known as the poison pill, a defensive strategy familiar to boards seeking to push back acquisitions but less familiar to investors of all. the days.
This defense mechanism was developed in the 1980s when business leaders, in the face of corporate raiders and hostile takeovers, tried to defend their businesses from takeover by another firm, person or group.
What is a poisonous pill?
A poisonous pill is a ploy that typically makes a company less appealing to a potential buyer, making it more expensive for the buyer to buy stock in the target company above a certain threshold.
“The point is to make the buyer’s advice offer more attractive,” said Carliss Chatman, an associate professor of law at Washington and Lee University.
The strategy also gives a company more time to evaluate a bid and can give the board leverage in an effort to force a direct negotiation with the prospective buyer.
Read more about Elon Musk and his offer on Twitter
The billionaire’s offer could be worth more than $ 40 billion and have far-reaching consequences for the social media society.
What does a poisonous pill actually look like?
A poisonous pill is officially known as a shareholder rights plan and can appear in a company’s statute or statute or exist as a shareholder agreement.
There are several types of poison pills, but they usually allow some shareholders to buy additional shares at a discounted price, said Ann Lipton, an associate professor of law at Tulane University.
The one shareholder blocked from making these discounted purchases is the one who triggers the poisonous pill. It is triggered when a person, usually the buyer, reaches a threshold for the number of shares he owns. If they reach that threshold, the value of their shares is suddenly diluted as other shareholders make discounted purchases.
Securities pundits say investors rarely try to break the poison pill threshold, although there are exceptions.
Papa John’s pizza chain took a poison pill in July 2018 in a rare case of a company trying to stop its founder from taking over. After using a racial slur in a conference call and sparking an uproar, founder, John Schnatter, resigned as chairman of the company’s board that year, owning 30% of his stock at the time.
The poison pill would have allowed shareholders to buy stock at a discount if Mr. Schnatter, his family or friends increased their stake in the company to 31% or if someone else bought 15% of the stock without board approval. of administration. The dispute ended in a settlement in March 2019.
In the case of Twitter, the pill would flood the market with new stock if Mr. Musk, or any other individual or group working together, bought 15% or more of Twitter’s stock. This would immediately dilute Mr. Musk’s holding and make acquiring a sizable portion of the company much more difficult. Mr. Musk currently owns more than 9 percent of the company’s shares.
Are there any limits to using a poisonous pill?
Ms Lipton said a company could be limited by the cap in its statute on how many shares it is authorized to issue. But even if she has reached that limit, she said, a company has other options to make the purchase unattractive.
And poison pills could also be evaded if the buyer or shareholders sue the company for violating its fiduciary duties. But, Ms. Lipton said, the courts have shown “an incredible reluctance” to interfere.
“Boards of directors have enormous leeway to judge what is in the best interests of shareholders, particularly if they are composed of independent directors,” he said. Boards often implement poison pills on a temporary basis so they can consider their options with more time.
Are poison pills effective?
A lot, according to Professor Chatman. He said hostile takeovers aren’t as common as they were in the 1980s because potential buyers now assume companies have poison pill arrangements in place.
In what other case were poison pills used?
Netflix successfully rejected billionaire investor Carl Icahn in November 2012, using a poisonous pill that would have made it more expensive for Mr. Icahn, or any other person or group, to accumulate more Netflix shares had he acquired 10% of the company without. the approval of his council.
Almost a year later, in October 2013, Men’s Wearhouse survived a takeover attempt by Jos. A. Bank Clothiers after taking a poisoned pill. (Men’s Wearhouse then acquired Jos. A. Bank in March 2014, and the owner of both companies filed for bankruptcy in August 2020).
In September 1985, in the wake of rumors that consumer goods company Philip Morris was targeting him, McDonald’s Corporation claimed it had adopted a poison pill plan to prevent “abusive takeover tactics.” (The company said the plan was not adopted in response to any known offer.) A few years later, the Walt Disney Company announced it had adopted one, calling it “a sound and reasonable means of safeguarding the interests of all shareholders. “.