Poison pill.
In plain English
A poison pill, formally a shareholder rights plan, is an anti-takeover device a board adopts on its own, without needing a shareholder vote, to make an unwanted buyer's stake more expensive to build. It gives every shareholder except the hostile buyer the right to purchase additional shares at a steep discount once that buyer accumulates a set percentage of the company. If triggered, the buyer's stake is diluted and the purchase becomes far more expensive. In practice pills are almost never triggered. They exist to force a bidder to negotiate with the board instead of buying shares in the open market.
01Why it matters
A pill can protect shareholders from a lowball bid or it can entrench a management team shareholders would rather replace, and which one it is depends entirely on the board that adopted it.
02The math, step by step
A bidder crosses a 15 percent trigger. Other holders buy shares at half price, so the bidder's 15 percent might fall toward 9 or 10 percent while the cost of reaching control rises sharply.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
A pill makes buying shares expensive. A staggered board makes replacing directors slow, because only part of the board stands for election each year. Bidders have historically found the combination far harder to beat than either defense alone.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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