What is a Poison Pill?

A poison pill, is a company’s defense against a potentially hostile, or unsolicited, takeover attempt.

The general idea of a poison pill is to dissuade any outside takeover attempt by either making the company less desirable or by typically diluting an acquirer’s ownership of the target. A common type of poison pill strategy is known as the “flip-in.”

The flip-in strategy entitles existing shareholders to acquire shares of the company at a significant discount. However, the flip-in option is only triggered when a potential acquirer purchases a specific percentage of the target company’s stock. Once that threshold is reached, then the poison pill becomes effective for all target shareholders, excluding the potential acquirer. Therefore, the potential acquirer’s ownership will be diluted to unacceptable levels.

In 2022 Twitter enacted a poison pill strategy after Elon Musk acquired a little over 9% of Twitter’s common stock. According to Twitter’s press release:

“The Rights Plan will reduce the likelihood that any entity, person or group gains control of Twitter through open market accumulation without paying all shareholders an appropriate control premium or without providing the Board sufficient time to make informed judgments and take actions that are in the best interests of shareholders.”

Twitter’s rights plan becomes exercisable if an entity, person or group acquires beneficial ownership of 15% or more of Twitter’s outstanding common stock in a transaction not approved by the Board. If the 15% threshold is crossed, rights holders would then be able to purchase Twitter stock for a 50% discount.

As WLRK’s takeover outline notes: “A rights plan may also allow the target company to exchange each right held by shareholders for one share of the target’s common stock. This provision avoids the expense of requiring rights holders to exercise their flip-in rights and eliminates any uncertainty as to whether individual holders will exercise their rights and produce the intended dilution.”