Poison Pill Law and Legal Definition
Poison pill is a corporation's defense against an unwanted take-over bid whereby shareholders are granted the right to purchase stock at a low price in order to increase the aggressor's acquisition costs. Poison pill plans typically are adopted to protect minority shareholders from inadequate takeovers and to increase the power of a company's board of directors to negotiate with potential acquirers.
The term "poison pill" generically refers to various defensive measures adopted by boards of directors in response to takeover attempts or in advance of possible takeover attempts that can cause severe economic repercussions in an acquirer or potential controlling person.
Five basic features of poison pill plans are:
(i) Flip-over provisions permitting rights holders to purchase stock in an Acquiring Person or surviving corporation at a bargain price following a business combination.
(ii) Flip-in provisions permitting rights holders, except Acquiring Persons, to purchase stock and/or debt of the issuer at a bargain price prior to, or regardless of, a subsequent business combination.
(iii) Back-end provisions entitling stockholders, except Acquiring Persons, to receive stock and/or debt of the issuer and/or cash generally valued (together with stock retained by the issuer's stockholders, if not required to be tendered to the issuer) at a premium over market for the issuer's stock.
(iv) Convertible preferred stock provisions entitling stockholders, except Acquiring Persons, to voting stock in the Acquiring Person as part of any business combination and to redeem their preferred stock for cash payments from the issuer if there is no business combination.
(v) Voting provisions involving the issuance of stock with supervoting rights not available to an Acquiring Person.
Although poison pills may effectively deter certain inadequate or otherwise undesirable offers, management and boards of directors must recognize that the adoption of poison pills is neither risk free nor guaranteed effective.
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