July/August 2009 / Features
The Future of Poison Pills
Since they were originally developed in the early 1980s, shareholder rights plans called “poison pills” have become recognized as a legal and effective way of deterring coercive takeover tactics and centralizing power in the board of directors in the event of a hostile takeover.
Under the typical plan, “rights” are granted to shareholders to buy additional stock of the company at a substantial discount in the event that a person acquires a specified ownership percentage of the company. Thus, the would-be acquiror is faced with a massive dilution of its position.
Poison pills, along with classified boards, are widely regarded as the two most effective takeover defenses, especially when used in combination. Unlike classified boards, shareholder rights plans generally can be adopted by a board of directors without shareholder approval, often within a few days from the time a threat arises.
Shareholder activism has prompted many companies to allow their plans to expire. The percentage of S&P 500 companies with a plan fell from 60 percent at the end of 2002 to less than 25 percent by the end of 2008.
Nevertheless, the author views poison pills as a vital defense. He suggests that companies considering adopting a plan should make the determination in conjunction with an analysis of their other defenses.
