Poison Pill

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Hello my name is Angelique Vega and welcome to TransLegal's lesson of the week.

Today I'll be discussing the “poison pill”.

The poison pill is a takeover defense used by publicly traded companies to discourage unwelcome acquisitions by making the stock less attractive to the acquirer.

There are several ways of achieving this.

You have the “flip in” which allows existing shareholders except the acquirer to buy more shares at a discount. The “flip over” which allows stock holders to buy the acquirer's shares at a discounted price after the merger. “Issuing convertibles” with below market exercise prices whose conversion is triggered by a takeover. You can also make employee and director share options, which would normally be exercisable in the future, immediately exercisable upon a takeover. And lastly, you can have agreements with customers that include compensation in the event of a takeover. For example, PeopleSoft, the subject to a bid by Oracle, seemingly agreed to compensate customers for the risk that a new owner would discontinue products forcing an expensive migration to new software.

The poison pill is intended to make the takeover so expensive that any attempt to take control will be abandoned.

Poison pills are designed to protect directors and are harmful to shareholders. Poison pills are designed to deny them the opportunity of selling to an acquirer usually at a significant premium to the price without bid interest. Shareholders and regulators have become less tolerant of poison pills and they have become more rare in most major markets, although Japan appears to be lagging in this respect.

Thank you. That's all we have today for poison pill. If you have any questions or comments, please leave them in the box below. Goodbye.