What is the defense of “poison pills”?

Twitter responded on Friday Elon Musk show To buy the company for more than $43 billion with a corporate vehicle known as A poison pilla defensive strategy familiar to boards of directors in an effort to ward off takeovers but less familiar to ordinary investors.

This defense mechanism was developed in the 1980s as corporate leaders, in the face of corporate raiders and hostile takeovers, attempted to defend their business from being taken over by another corporation, person or group.

What is the poison pill?

A toxic pill is a maneuver that makes a company less palatable to a potential buyer by making it more expensive for the buyer to buy shares of the target company above a certain threshold.

“The whole point of this is to make the board’s offer more attractive to the buyer,” said Carlis Chatman, associate professor of law at the University of Washington and Lee University.

The strategy also gives the company more time to evaluate the offer and can give the board of directors leverage in trying to force direct negotiations with the potential buyer.

What does a poison pill actually look like?

Formally known as an equity plan, the toxic pill can appear in a company’s charter, bylaws, or exist as a contract between shareholders.

There are different types of poison pills, said Ann Lipton, associate professor of law at Tulane University, but they usually allow some shareholders to buy additional stock at a discount.

The only contributor who was prevented from making these discount purchases was the person who released the poison pill. It is triggered when a person, usually a buyer, reaches a threshold for the number of shares he or she owns. If they get this far, their shares are suddenly diluted as other shareholders make discounted purchases.

Securities experts say investors rarely attempt to breach the toxic pill’s threshold, although there are exceptions.

Pizza chain Papa John’s has adopted a poisonous pill in July 2018 In the rare case of a company trying to prevent its founder from taking over. Founder John Schnatter left after report that he used racist slurs on a conference call, A statement later said in court had been mischaracterized. He owned 30 percent of its shares at the time.

The Poison Pill would have allowed shareholders to buy shares at a discount if Schnatter, his family members or friends raised their stake in the company to 31 percent or if anyone else bought 15 percent of the shares without board approval. The dispute ended with a settlement In March 2019.

In the case of Twitter, Contraceptive pills will flood the market with new shares If Mr. Musk, or any other individual or group working together, buys 15 percent or more of Twitter stock. This would immediately dilute Mr. Musk’s stake and make it more difficult to buy a large part of the company. Mr. Musk currently owns more than 9 percent of the company’s stock.

Are there limits to the use of toxic pills?

Ms Lipton said the company could be limited by the cap in its charter on the number of shares it is allowed to issue. But she said that even if it reached that limit, the company had other options to make the purchase unattractive.

Poison pills can also be evaded if the buyer or shareholders sue the company for breach of its fiduciary duties. But Lipton said the courts had shown an “incredible reluctance” to intervene.

“Boards of directors have a great deal of leeway to judge what is in the best interests of shareholders, particularly if they are made up of independent board members,” she said. Boards often use toxic pills temporarily so they can consider their options more time.

Are poison pills effective?

Very, according to Professor Chatman. She said hostile takeovers are not as common as they were in the 1980s because potential acquirers now assume that companies have judgments about toxic pills.

When were poison pills used?

Netflix has frustrated billionaire investor Carl Icahn in november 2012using a toxic pill that would make it more expensive for Mr. Icahn, or another person or group, to accumulate more shares in Netflix if they acquired 10 percent of the company without the approval of its board of directors.

After about a year, in october 2013, Men Wearhouse survived a takeover attempt by Jos. A. Bank clothes after he adopted a poison pill. (Then the Men’s Ware House acquired Jos. A. Bank in March 2014The owner of the two companies filed for bankruptcy in August 2020.)

at September 1985In the wake of rumors that consumer goods company Philip Morris was targeting it, McDonald’s said it had adopted a poison pill plan to prevent “arbitrary takeover tactics.” (The company said the plan was not adopted in response to any known bid.) A few years later, The Walt Disney Company announce It has adopted one, describing it as a “sound and reasonable means of protecting the interests of all shareholders.”