A poison pill is a type of defensive tactic used by a company to make itself less attractive to a hostile takeover bid. A poison pill is typically a clause in the company’s charter that gives shareholders the right to buy more shares at a discount if the company is acquired by an outside party. This makes it more expensive for the acquirer to buy a controlling stake in the company, and therefore less likely that the takeover bid will succeed.
Anti-takeover defense includes:
- Issuing of preferred stocks w/ special rights to the board
- Control of shareholder meeting schedule
- Option for existing shareholders to buy more stock at a discount (thereby diluting stake of the party trying a hostile/unsolicited takeover)
When Does A Company Deploy Poison Pill?
A company may deploy a poison pill when it is under threat of a hostile takeover.
Netflix did a similar maneuver in 2012 to thwart Carl Icahn.
In 2012, Netflix’s stock was struggling. Famed corporate raider Carl Icahn built up a 9.98% position in Netflix and said the company should be acquired by MSFT or AMZN. NFLX adopted a poison pill that would kick in if an individual acquired 10% (or an Institutional acquired 20%).
Netflix management wasn’t interested in getting acquired. And if Icahn triggered the poison pill, Netflix would flood the market with shares and dilute his stake.
When Will Twitter’s Poison Pill Go Into Effect
Twitter’s current poison pill will go into effect if a shareholder acquires 15% or more of the company (the plan expires in April 2023). Elon currently has 9.1%. Here is what would happen if he crossed 15%: