A shareholder rights plan, colloquially known as a "poison pill", is a type of defensive tactic used by a corporation's board of directors against a takeover.
[3] Poison pills became popular during the early 1980s in response to the wave of takeovers by corporate raiders such as T. Boone Pickens and Carl Icahn.
[5] Analysts suggested that Microsoft's raised offer of $33 per share was already too expensive, and that Yang was not bargaining in good faith, which later led to several shareholder lawsuits and an aborted proxy fight from Carl Icahn.
[6][7] Yahoo's stock price plunged after Microsoft withdrew the bid, and Jerry Yang faced a backlash from stockholders that eventually led to his resignation.
As stock prices plummeted due to the pandemic, various companies turned to shareholder rights plans to defend against opportunistic takeover offers.
[8] The Twitter Board of Directors unanimously enacted a shareholder rights plan in 2022 following an unsolicited purchase offer from Elon Musk.
Using this type of poison pill also dilutes shares held by the acquiring company, making the takeover attempt more expensive and more difficult.
If an unfriendly bidder acquired a substantial quantity of the target firm's voting common stock, it then still would not be able to exercise control over its purchase.
However, the Delaware Supreme Court upheld poison pills as a valid instrument of takeover defense in its 1985 decision in Moran v. Household International, Inc.
Shareholder rights plans in Canada are also weakened by the ability of a hostile acquirer to petition the provincial securities regulators to have the company's pill overturned.
Despite similar facts with previous cases in which securities regulators had promptly taken down pills, the Ontario Securities Commission ruled that Falconbridge's pill could remain in place for a further limited period as it had the effect of sustaining the auction for Falconbridge by preventing Xstrata increasing its ownership and potentially obtaining a blocking position that would prevent other bidders from obtaining 100% of the shares.
If these companies had poison pills, they could have prevented the raids by threatening to dilute the positions of their hostile suitors if they exceeded the statutory levels (often 10% of the outstanding shares) in the rights plan.
Takeover law is still evolving in continental Europe, as individual countries slowly fall in line with requirements mandated by the European Commission.
Governments have also served as "poison pills" by threatening potential suitors with negative regulatory developments if they pursue the takeover.
Examples of this include Spain's adoption of new rules for the ownership of energy companies after E.ON of Germany made a hostile bid for Endesa and France's threats to punish any potential acquiror of Groupe Danone.
Although the broad category of takeover defenses (more commonly known as "shark repellents") includes the traditional shareholder rights plan poison pill.