A poison pill strategy to discourage hostile takeovers

The poison pill tactic has been around since the 1980s and was devised by New York-based legal firm Wachtell, Lipton, Rosen, and Katz. The name comes from the poison pill spies carried in the past to avoid being questioned by their enemies in the event they were captured. It was designed as a way to prevent an acquiring company from buying a majority share in the potential target or from negotiating with shareholders directly at a time when takeovers were becoming very frequent and common.

What’s a Flip-In Poison Pill?

A flip-in poison pill strategy involves allowing the shareholders, except for the acquirer, to purchase additional shares at a discount. Though purchasing additional shares provides shareholders with instantaneous profits, the practice dilutes the value of the limited number of shares already purchased by the acquiring company. This right to purchase is given to the shareholders before the takeover is finalized and is often triggered when the acquirer amasses a certain threshold percentage of shares of the target company.

What’s a Flip-Over Poison Pill?

A flip-over poison pill strategy allows stockholders of the target company to purchase the shares of the acquiring company at a deeply discounted price if the hostile takeover attempt is successful. For example, a target company shareholder may gain the right to buy the stock of its acquirer at a two-for-one rate, thereby diluting the equity in the acquiring company. The acquirer may avoid going ahead with such acquisitions if it perceives a dilution of value post-acquisition.