What is a Poison Pill in the Corporate world?
Spies would swallow these poison pills if they thought they were about to be caught, similarly this kind of strategy is implemented in the Corporate world, when a company may employ poison pill tactics to avoid such hostile takeovers. The poison pill tactic was first credited to the law firm Wachtell, Lipton, Rosen, and Katz in the 1980s. The poison pill term originated from spies who carried toxic pills that could be ingested to avoid capture.
It is called as a shareholder rights plan, commonly called as poison pill as a company’s defense against potentially hostile , or unsolicited and attempted takeover of a company.
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 2012 Netflix adopted a Poison Pill to fend off Carl Icahn from effecting a hostile takeover. Upon learning that Icahn had acquired a 10% stake in the company, Netflix immediately went on the defensive. Any attempt to buy a large equity position in Netflix without board approval would result in flooding the market with new shares, making any stake attempt very expensive.
In latest case it is applied in papa jones pizza company in 2022. Papa John’s is preparing for a fight against John Schnatter, the pizza chain’s founder and former chairman, by adopting a so-called poison pill defense to protect itself against a hostile takeover attempt.