5 Biggest Types of Poison Pills in the Business World

5 Biggest Types of Poison Pills in the Business World

From golden parachutes to back-end rights plans, here are the top five poison pills in the business world.

In the business world, little is more important than protecting your company at any cost. Sometimes, those costs can be very high, demanding that you give up your business altogether. To prevent that from happening, most companies employ a tactic referred to as poison pills.

A poison pill is a shareholder plan to discourage buyouts, takeovers and acquisition attempts by activist investors. For instance, in 2012, Netflix inserted a “poison pill” clause into its corporate charter that would have made a hostile takeover prohibitively expensive, thus keeping it safe from a takeover by activist investor Carl Icahn.

However, poison pills don’t always have to be so dramatic. Sometimes, they can be much more subtle and just as effective at scuttling a deal. Here are the five biggest types of poison pills in the business world:

1. Flip-in

These are clauses that allow a company’s board of directors to issue new shares of stock to existing shareholders at a discount if someone tries to acquire a large stake in the company. The idea of a flip-in poison pill is to make a hostile takeover much more difficult and costly for the buyer by diluting the potential acquirer’s stake.

For example, let’s say Company A has 50% of the shares of Company B and wants to buy the rest. Company B has a flip-in provision that allows any shareholder with at least 10% of the shares to purchase new shares at half price if Company A buys more than 50% of the company. So, suppose Company A tries to buy 51% of the shares. In that case, the other shareholders can effectively dilute Company A’s ownership by buying new shares at half price, making it much more challenging (and expensive) for Company A to get a majority stake.

2. Flip-over

In a flip-over provision, the existing shareholders of the target company in a takeover attempt can buy shares in the acquiring company at a discounted price. This devalues the stock price of the acquiring company, thus discouraging them from taking over the target company. Essentially, the takeover attempt is literally “flipped over”.  

Let’s take a flip-over provision in a merger agreement as an example. Assume that Company A wants to buy Company B, but Company B doesn’t want to be bought. To ward off Company A, Company B might agree to a flip-over provision that would allow Company B’s shareholders to purchase new shares of Company A at half price if it ever acquires more than 30% of the company. 

3. Preferred stock plans

Preferred stock is a type of stock that gives its holders certain privileges, such as redeeming dividends and assets at the highest possible share price they have paid for the common stock in case of a takeover. Secondly, they are even given special voting rights. The holders of preferred stock (except for the acquirer) would have greater voting power than the holder of common stock, making it less appealing for an outsider to take over the company. Overall, the goal is to dilute the total number of shares available to the acquiring company. 

4. Golden parachutes

A golden parachute comprises a host of benefits, like a hefty severance package, designed to keep key executives at a company during a change in ownership. For instance, in the case of a successful takeover, the original executives might receive a lump sum payment, stock compensation, ongoing insurance and pension benefits, etc., if they are terminated. Golden parachutes are often used as poison pills because they make it much more expensive for a potential acquirer to replace key personnel.

5. Back-end rights plan

As part of the back-end rights plan, existing shareholders of a company can choose to sell their securities in return for cash. Typically, during a merger or acquisition, the acquiring company will buy the majority of shares and gain significant voting rights. Then, it would attempt to force others to give up their stake for a lower share price. However, to make that unappealing, the back-end rights plan gives shareholders the option to sell their securities for cash for a high bid externally. This way, if an acquirer does try to take over the company, they will have to quote a much higher price. 

Poison pills can help you keep your company safe from a hostile takeover. However, they are not a fail-safe tactic; after all, if the acquiring company wants your company enough, it might be willing to undertake any expense for it. In times like those, your best bet might be negotiating a deal that benefits everyone. 

Also read:

Header Image by Freepik

SHARE THIS STORY

Share on facebook
Share on twitter
Share on linkedin
Share on email

RELATED POSTS

Mercedes-Benz Launches the New Luxurious CLE Cabriolet

Mercedes-Benz has launched the CLE Cabriolet, building on its heritage of creating four-seater convertible vehicles. This new addition is characterized by its expressive design, advanced technology, and high-quality features, ensuring an enhanced driving experience. The model, which evolves from the CLE Coupé, stands out with its traditional fabric acoustic soft top and distinct high-quality details, making it uniquely positioned in the market. Designed to offer dynamic performance alongside exceptional daily comfort, the CLE Cabriolet supports year-round open-air enjoyment.

4 Companies Reusing Coffee Husk for Eco-Friendly Innovations

A daily cup of coffee is more than just a morning ritual—it’s a powerhouse of energy and health benefits. Beyond keeping you alert, coffee supports brain health, maintains liver function and may even lower the risk of depression. However, the journey of coffee from plantation to mug involves an energy-intensive process that produces significant waste, particularly coffee husks.

Fort Worth Hosts New LG Electronics Facility for EV Charger Assembly

LG Electronics has initiated its first U.S. production facility for electric vehicle (EV) charging stations in Fort Worth, Texas, aiming to bolster the national EV charging infrastructure and generate employment opportunities. The facility’s inauguration was marked by an event attended by Fort Worth Mayor Mattie Parker and LG executives Alec Jang, H.K. Suh and Nicolas Min. This development is part of LG’s strategy to expand its presence in the EV charger market by providing high-quality charging solutions and services.

KPMG Introduces “The Road to Leadership” along with Harvard Business School

KPMG in India and Harvard Business School Publishing Corporation (HBSPC) have announced a collaboration to launch “The Road to Leadership”, a program designed to empower mid-level managers with the skills and insights needed to ascend to leadership roles. This collaboration brings together HBSPC’s rich legacy in leadership education and KPMG’s deep industry experience, offering participants a unique blend of theoretical knowledge and practical insights tailored for the Indian context.

What Are the Negative Impacts of AI on the Film Industry?

The arrival of artificial intelligence (AI) in filmmaking is changing the game, introducing endless possibilities into an industry known for its creativity. Hollywood, known for its glitz and glamour, is already on board, using AI to pick out potential hits through script analysis and predictive analytics. This allows filmmakers to make data-informed decisions on which scripts might win the audience’s hearts.