Explained | ‘Poison pill’ and other corporate defence mechanisms to prevent hostile takeovers

What is the News?

Twitter is trying to thwart billionaire Elon Musk’s takeover attempt with a “Poison Pill”. This ​​would make it much more expensive and complicated for the Tesla CEO to take control of Twitter. Acquirer

What is Poison Pill?

Poison Pill is a corporate defense strategy utilized by a target company to prevent or discourage hostile takeover attempts.

Under this mechanism, existing shareholders, excluding the acquiring entity purchase additional shares at a discounted rate making it difficult for the acquirer to establish a majority stake in the company.

What are the other corporate defence mechanisms?

Greenmail Defence: In this, the company will pay them to go away and stop threatening the company with a hostile takeover. It involves the target company repurchasing its own shares at a premium and in a quantity enough to prevent a hostile takeover. 

Crown Jewel defence: The mechanism involves the target company spinning off its crown jewel unit, or its most valued asset, in order to make the acquisition less desirable for the acquirer. The asset could be the unit that is the most profitable unit in the company or is important for future profitability or produces the flagship product of the company.

Pac-man defence: In this, the company will prevent a hostile takeover by initiating a reverse takeover. It involves the target company making an offer to acquire the company that commenced the takeover bid. The target company could make use of its ‘war chest’ or secure finances from outside for the reverse takeover bid.

White Knight defence: In case a company’s board finds itself in a situation where it cannot prevent a hostile takeover, it seeks a more accommodative and cordial firm to acquire a controlling stake from the hostile acquirer.

Source: This post is based on the article “Explained | ‘Poison pill’ and other corporate defence mechanisms to prevent hostile takeovers” published in The Hindu on 18th April 2022.