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What is a Poison Pill? How Do They Work and What Are the Benefits?

Apr 26, 2022
Stock Trading

In business, there are a variety of tools and strategies that can be used to protect a company from hostile takeover. One such tool is the poison pill. This is a strategy that can be employed by a company to make it less attractive to potential buyers. In this blog post, we will discuss what a poison pill is, how it works, and some of the benefits of using this strategy!

Do you own shares in a company? If so, it's important to know about poison pills. A poison pill is a type of takeover defense that companies can use to discourage hostile takeovers. In this blog post, we will discuss what a poison pill is, how it works, and the benefits of using them!

What is a Poison Pill?

A poison pill is a type of takeover defense that companies can use to discourage hostile takeovers. A poison pill gives shareholders the right to buy more shares at a discount if an unsolicited bid is made for the company. This makes it harder for the bidder to acquire a majority stake in the company. The poison pill expires after a certain period of time, usually one year.

There are two types of poison pills: flip-over and stand-alone. Flip-over pills are only triggered when someone acquires more than 50% of the company's shares. Stand-alone pills are triggered when someone acquires more than a certain percentage of the company's shares, typically between 20-30%.

Poison pills are controversial because they can be used to entrench management. They can also make it harder for shareholders to sell their shares. For these reasons, poison pills are not always popular with shareholders.

Are Poison Pills Legal?

In the United States, poison pills are legal. The SEC has rules in place that govern how and when companies can use poison pills. For example, companies must disclose their poison pill defenses to shareholders before they can be used.

Poison pills have been used by a number of high-profile companies, including Microsoft, Apple, Google, and Facebook.

Are Poison Pills Ethical?

This is a difficult question to answer. Some people argue that poison pills are unethical because they can be used to entrench management and make it harder for shareholders to sell their shares. Others argue that poison pills are a legitimate form of takeover defense and that companies have a right to use them.

At the end of the day, whether or not you believe that poison pills are ethical is a personal decision.

Did the Poison Pill Strategy help Elon Musk buy Twitter?

No, the poison pill did not help Elon Musk buy Twitter. The poison pill was put in place to prevent hostile takeovers, and it worked as intended. Musk was only briefly able to acquire a majority stake in Twitter.

Elon Musk was only a majority stake in Twitter for a brief period, but he was still able to buy the company. He did this by acquiring a significant minority stake in the company and then agreeing to a friendly takeover with the board of directors. The poison pill defense didn't help him acquire Twitter, but it didn't stop him either.

Is the Poison Pill Strategy Here to Stay?

The poison pill strategy is gaining in popularity. In recent years, there has been an increase in the number of companies using poison pills to defend against hostile takeovers. This is likely due to the fact that hostile takeovers have become more common in recent years.

Poison pills are not without their critics, but they are a popular and effective way for companies to defend themselves against hostile takeovers. If you're thinking about using a poison pill defense, make sure to consult with your financial advisor first. Poison pills can be complex, and they may not be right for every company.

So there you have it! A basic overview of what a poison pill is and how it works. While there are some downsides to using them, overall they can be a helpful tool for companies looking to discourage hostile takeovers.

Meet The Author:


Cameron Brown

Cameron Brown

I am responsible and accountable for the smooth running of our computer systems and related software within the limits of requirements, specifications, costs and timelines. I supervise the implementation and maintenance of our company’s computing needs.
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The opinions expressed in our published works are those of the author(s) and do not necessarily reflect the opinions of the National Association for the Self-Employed or its members.

Courtesy of NASE.org
https://www.nase.org/business-help/self-made-nase-blog/self-made/2022/04/26/what-is-a-poison-pill-how-do-they-work-and-what-are-the-benefits