Poison pill
Also known as: shareholder rights plan
A poison pill, formally called a shareholder rights plan, is a takeover defense that a company's board can adopt to make a much harder and more expensive to complete. It works by giving existing , other than the acquirer attempting the takeover, the right to buy additional shares at a steep discount once that acquirer's ownership stake crosses a set threshold, often somewhere around ten to twenty percent.
If triggered, the resulting flood of newly purchased discounted shares dramatically dilutes the would-be acquirer's stake and voting power, making it far more costly to gain control of the company without the board's cooperation. Boards can typically adopt a poison pill quickly, without needing a vote, which makes it one of the fastest defenses available once an unwanted bidder emerges.
Poison pills are controversial. Supporters argue they give a board to negotiate a higher price or more time to find a better outcome instead of being forced to accept the first offer that comes along. Critics argue they can also be used to entrench management and block deals that themselves might prefer, which is why some poison pills include a provision letting vote to remove it after a period of time.