What is the protection of a “poison pill”?

On Friday, Twitter opposed Elon Musk’s offer to buy the company for more than $ 43 billion with a corporate tool known as a poison pill, a defense strategy familiar to boarders trying to repel takeovers but less familiar to ordinary investors. .

This protection mechanism was developed in the 1980s, when company leaders facing corporate attackers and hostile acquisitions tried to protect their business from acquisition by another company, person or group.

The poison pill is a maneuver that usually makes a company more unpleasant to a potential acquirer, making it more expensive for the acquirer to buy shares in the target company above a certain threshold.

“The whole point is to make the board’s offer more attractive than the acquirer,” said Carlisle Chatman, an associate professor of law at Washington and Lee University.

The strategy also gives the company more time to evaluate the offer and can give a lever on board in an attempt to impose direct negotiations with the potential acquirer.

The poison pill is officially known as a shareholder rights plan and may appear in the company’s bylaws or bylaws or exist as a contract between shareholders.

There are different types of poison pills, but they usually allow certain shareholders to buy additional shares at a reduced price, said Anne Lipton, an associate professor of law at Tulane University.

The only shareholder blocked from making these discounted purchases is the one who triggers the poison pill. Triggered when a person, usually the acquirer, reaches the threshold for the number of shares it holds. If they reach this threshold, the value of their shares suddenly dilutes as other shareholders make discounted purchases.

Securities experts say investors rarely try to cross the threshold of poison pills, although there are exceptions.

Papa John’s pizzeria chain adopted a poison pill in July 2018 on a rare occasion of a company trying to block its founder from taking over. Founder John Schnater left after a report that he used racial insult in a conference call, a statement he later said in court was incorrectly characterized. At the time, he owned 30 percent of his shares.

The poison pill would allow shareholders to buy shares at a discount if Mr Schnater, members of his family or friends increased their stake in the company to 31 per cent or if someone else bought 15 per cent of the shares without board approval. The dispute ended with the settlement of the dispute in March 2019.

In the case of Twitter, the pill will flood the market with new stocks if Mr Musk or another person or group working together buys 15 per cent or more of Twitter’s stock. This would immediately dilute Mr Musk’s case and make it significantly more difficult to buy a significant part of the company. Mr Musk currently owns more than 9 percent of the company’s stock.

Ms. Lipton said a company could be limited by a ceiling in its statutes on how many shares it could issue. But even if it reaches that ceiling, she said, a company has other options to make the purchase unattractive.

And poison pills can also be avoided if the acquirer or shareholders sue the company for breach of its fiduciary duties. But, Ms. Lipton said, the courts have shown “incredible reluctance” to intervene.

“Boards have great leeway to judge what is in the best interests of shareholders, especially if they are made up of independent directors,” she said. Boards often take poison pills temporarily so they can consider their options for longer.

A lot, according to Professor Chatman. She said hostile takeovers were less common than in the 1980s because potential acquirers now speculate that companies have regulations on poison pills.

Netflix successfully repelled billionaire investor Carl Aikan in November 2012, using a poison pill that would make it more expensive for Mr. Aikan or another person or group to accumulate more shares in Netflix if it acquired 10% of the company without board approval .

Almost a year later, in October 2013, Men’s Wearhouse survived an acquisition attempt by Jos. A. Bank Clothiers after taking a poison pill. (Men’s Wearhouse then acquired Jos. A. Bank in March 2014 and the owner of both companies filed for bankruptcy in August 2020)

In September 1985, after rumors surfaced that consumer goods company Philip Morris was targeting it, McDonald’s Corporation said it had adopted a poison pill plan to prevent “swallowing abuse tactics.” (The company said the plan was not accepted in response to any known offer.) A few years later, Walt Disney announced that it had accepted it, calling it “a sound and reasonable means of protecting the interests of all shareholders.”

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