Recently we heard on the news and read in the media about a company that was considering a so-called “poison pill” and thought it might be helpful for us to take a few paragraphs and describe the strategy and how it may be used as an investment tactic.
Briefly stated, a poison pill strategy is an investment agreement engineered to discourage hostile takeovers of the target company, making such an action less appealing for the party or parties trying to execute the takeover.
The strategy may take one of at least two forms. Before a possible takeover, existing shareholders may be allowed to acquire the target company shares at a discount, diluting the interest of the potential acquirer and/or making such a move more expensive for them. After a takeover, former existing shareholders may be allowed to purchase target company shares at a discount.
These poison pill shareholder agreements may be engineered to “kick in” after any one shareholder’s or affiliated group’s interest exceeds a certain percentage of the total outstanding shares.
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