Poison Pill

A poison pill, formally known as a shareholder rights plan, is a defensive mechanism adopted by a company's board of directors to prevent or discourage hostile takeover attempts. When triggered — typically when an acquiring party accumulates more than a specified ownership threshold (often 10-15% of outstanding shares) — the poison pill allows existing shareholders to purchase additional shares at a steep discount, massively diluting the hostile acquirer's stake and making the takeover prohibitively expensive. There are two main types: "flip-in" pills (allowing existing shareholders to buy discounted shares in the target company) and "flip-over" pills (allowing shareholders to buy the acquirer's shares at a discount after a merger). While poison pills effectively protect companies from unwanted takeovers, critics argue they can entrench management and prevent shareholders from receiving premium takeover offers. Delaware courts have generally upheld poison pills when adopted in good faith.