What is the Poison Pill Defense?

The poison pill defense is used by a company that does not want to be acquired, making the acquisition more expensive for an acquirer. When a poison pill provision is present, a hostile acquirer is more likely to be deterred from making an acquisition attempt. This provision can also be used to obtain a higher price from an acquirer that is not considered to be hostile.

Types of Poison Pill Defenses

One type of poison pill is a shareholder rights plan that allows all shareholders except for the acquirer to purchase additional shares at a discount, which is effected by attaching a stock warrant to each share sold. By doing so, the acquirer will have to buy additional shares in order to complete the acquisition, while existing shareholders profit from the sale of their newly-acquired shares. This discount provision is typically triggered when an outside party gains a certain predetermined percentage ownership of all outstanding shares, such as 30%.