Beijing time on April 16th news, Twitter on Friday officially launched a method known as “”Poison Pill Program” as a corporate tool to counter Elon Musk’s $43 billion-plus takeover of the company. The defensive strategy isTrying to fend off a hostile takeoverIt is common in the board of directors of , but less familiar to the average investor.
This defense mechanism is1980sdeveloped. At that time, business leaders devised such a mechanism in the face of intruders and hostile takeovers, trying to protect their businesses from being acquired by other companies, individuals or groups.
What is the “Poison Pill Program”?
A “poison pill” refers to a tactic that typically allows an acquirer to acquire shares in a target company beyond a certain thresholdpay a higher pricethereby reducing the company’s attractiveness to potential acquirers.
“The purpose is to make the board’s offer more attractive than the acquirer’s. ” said Carliss Chatman, an associate professor of law at Washington and Lee University.
The strategy also gives companies more time to evaluate a takeover offer and gives boards leverage to force potential acquirers to negotiate directly with them.
How to do it?
The official name of the “Poison Pill Program” isShareholders’ Equity Plan. It can appear in a company’s articles of association or bylaws, or it can exist as a contract between shareholders.
According to Ann Lipton, an associate professor of law at Tulane University, there are different types of “poison pills”, but typically they allow certain shareholders to buy additional stock at a discount.
The only shareholder prevented from buying shares at a discount is the one who triggered the “poison pill.”When a person (usually the acquirer) owns a certain threshold of shares, the “Poison Pill Plan” will be triggered. If they hit that threshold, the value of their shares would suddenly be diluted by other shareholders buying more shares at a discount.
In practice, the board of directors of the company has passed an equity dilution clause in advance. Once the hostile party acquires a certain percentage of the company’s shares (usually 10% to 20% of the shares), the clause will be triggered to take effect.So that the original shareholders of the company can obtain a large number of shares in the company at a lower pricethereby raising the cost of the acquirer.
In July 2018, pizza chain Papa John’s adopted a “poison pill” in a rare attempt to prevent its founders from buying the company. Papa John’s Pizza founder John Schnatter resigned as chairman that year after he sparked an uproar after making a racist remark on a conference call. At that time, he held a 30% stake in the company.
According to Papa John’s “poison pill plan”, if Schnatter and his family or friends increase their stake in the company to 31%, or if someone else buys 15% of the company without board approval shares, then shareholders can buy shares of the company at a discounted price. The dispute ended in a settlement in March 2019.
In Twitter’s case, if Musk or any other individual or team cooperated to buy 15% or more of Twitter’s shares, the “poison pill” would send the stock market down.New shares from Twitter are everywhere. That would immediately dilute Musk’s stake, making it much more difficult for a sizable stake in the company to be acquired. Musk currently owns more than 9% of the company.
Are there any limitations?
Associate Professor Lipton said a company may have in its articles of association a limit on the number of shares it is allowed to issueupper limit, which would limit the “poison pill” program. But even at that cap, companies have other options to make acquisitions less attractive, she said.
If an acquirer or shareholder sues the companybreach of its fiduciary duty, then the “poison pill plan” can also be circumvented. However, Lipton noted that courts have shown “incredible reluctance” to intervene in such disputes.
“Boards have a lot of leeway in deciding what is in the best interests of shareholders, especially if they are made up of independent directors,” she said. Boards often implement “poison pills” on an ad hoc basis so they can have more time to consider their options.
Does it work?
very effective. Associate Professor Chatman said hostile takeovers were not as common as they were in the 1980s, as potential acquirers now believed companies had developed a “poison pill” clause.
success case
In November 2012, Netflix used a “poison pill” to fend off a hostile takeover by billionaire investor Carl Icahn. Under the plan, if Icahn, or any other individual or group, bought a 10% stake in the company without board approval, they would have to pay more if they wanted to accumulate more Netflix shares.
▲ Netflix successfully used the “poison pill plan”
Nearly a year later, in October 2013, Men’s Wearhouse used a “poison pill” to fend off an acquisition attempt by men’s apparel and accessories retailer Jos. A. Bank Clothiers. The men’s apparel company subsequently acquired Jos. A. Bank Clothiers in March 2014, and the owners of both companies filed for bankruptcy in August 2020.
In September 1985, following rumors that consumer goods company Philip Morris was targeting McDonald’s, McDonald’s said the company had adopted a “poison pill” to prevent “abuse of acquisition tactics.” But the company also noted that the plan was not in response to any known takeover bids. A few years later, The Walt Disney Company adopted this plan, calling it “a sound and reasonable approach to protecting the interests of all shareholders.”
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