Poison Pill (Shareholder Rights Plan)

Category: legal

A defensive corporate governance structure used by a target company’s board to prevent a hostile takeover.

A poison pill allows existing shareholders (excluding the hostile bidder) to purchase additional shares at a massive discount once an acquirer crosses a specific ownership threshold (typically 10-15%). This floods the market with new stock, drastically diluting the acquirer’s equity stake and voting power, making the unapproved takeover attempt prohibitively expensive.

Common Examples

• The board activated its poison pill plan after the activist fund acquired a twelve percent stake without executive approval.
• Implementing a poison pill forces the hostile bidder to negotiate directly with the board rather than launching an aggressive tender offer to shareholders.