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Poison Pill and other corporate defence mechanisms

  • IASbaba
  • April 23, 2022
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Poison Pill and other corporate defence mechanisms

Context: Publicly listed companies across the globe often witness threats of hostile takeovers, which take place through a back-door accumulation of shares. However, with time, they have come up with varied defence mechanisms to prevent such takeovers.

Elon Musk who currently owns about 9% of Twitter shares (second biggest shareholder) made a bid to acquire Twitter and take it private to restore its commitment to free speech.

The company’s board has resisted this and deployed the “poison pill” mechanism

About Poison Pill Mechanism

  • Officially known as a shareholder rights plan, it is a defence tactic utilized by a target company to prevent or discourage hostile takeover attempts.
  • The plan would allow existing shareholders, excluding the acquiring entity — Mr Musk in this case — to purchase additional shares at a discounted rate, making it difficult for the acquirer to establish a majority stake in the company.
  • The mechanism protects minority shareholders and avoids the change of control of company management.
  • Poison pills also often open the door to further negotiations that can force a bidder to sweeten the deal.
  • If a higher price makes sense to the board, a poison pill can simply be cast aside, clearing the way for a sale to complete.

Other defence mechanisms are:

Greenmail Defence  

 

·       The idea here is simple: pay them to go away and stop threatening the company with 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 (making it a separate entity) its crown jewel unit or its most valued asset, in order to make the acquisition less desirable for the acquirer.
Pac-man defence

 

·       Prevent a hostile takeover by initiating a reverse takeover. It involves the target company making an offer to the acquire the company that commenced the takeover bid.

·       The target company could make use of its ‘war chest’ or securing finances from outside for the reverse takeover bid.

White Knight defence  

 

·       Here, a ‘friendly’ company acquires a corporation at fair consideration when it is on the verge of being taken over by an ‘unfriendly’ acquirer. The unfriendly bidder is generally known as the “black knight.”

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