What Is a Poison Pill?
A poison pill is a corporate defense strategy used to discourage or block a hostile takeover. Formally called a "shareholder rights plan," it makes a company prohibitively expensive or unattractive to acquire without the board's approval — giving the board leverage to negotiate or to fend off an unwanted bidder. It is a tool of corporate governance, not a contract term.
How a Poison Pill Works
- The plan is triggered when an acquirer's stake crosses a set threshold (for example, 10–20%)
- Existing shareholders other than the acquirer gain the right to buy additional shares at a steep discount
- This dilutes the hostile bidder's stake and dramatically raises the cost of the takeover
Purpose and Limits
The board's stated goal is usually to protect shareholders from a coercive or undervalued offer and to preserve negotiating leverage. Poison pills are controversial because they can also entrench management. They are governed by the corporation's governing documents and the corporate law of the state of incorporation, and the board adopting one remains subject to its fiduciary duties to shareholders.
Related Terms
- Fiduciary Duty — What constrains a board adopting a pill
- Shareholder Agreement — Where shareholder rights and control are set
- Merger — A transaction a poison pill can block
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Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC