A poison pill is an attempt to discourage an acquisition by making it more expensive to acquire a company, or by reducing the value of the acquired business.
A poison pill relies on setting up an essentially destructive mechanism that would be triggered by a takeover, or by an event likely to be linked to a takeover (e.g., triggered by the purchase of certain proportion of shares by any one person).
Poison pills include:
- issuing convertibles, with below market exercise prices, whose conversion is triggered by a takeover
- making employees and directors share options (that would normally be exercisable in the future) immediately exercisable on a takeover
- agreements with customers that include compensation in the event of a takeover (for example, Peoplesoft when subject to a bid by Oracle - ostensibly to compensate customers for the risk that a new owner would discontinue products, forcing an expensive migration to new software).
Poison pills are largely designed to protect directors, and are harmful to shareholders. Poison pills are designed to deny them the opportunity of selling to an acquirer (usually at a significant premium to the price without bid interest). Shareholders and regulators have become less tolerant of poison pills, and they have become rarer in most major markets, although Japan appears to be lagging in this respect.