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Poison pill is a term referring to any strategy, generally in business or politics, which attempts to avoid a negative outcome by increasing the costs of that outcome to those who seek it. This is a reference to literal poison pills (actually often vials of cyanide salts) carried by various spies throughout history, and by Allied leaders in the second world war. 1 Business
In business, it is often used to avoid a hostile takeover bid. These are attempts by a potential acquirer to obtain just over 50% of the shares of the target company, and thereby gain control of the board and, through it, the company's management. There are several types of "poison pills" that can be planned by a company that thinks it may be the target of a takeover by a potential acquirer:
- The target issues a large number of new shares, often preferred shares, to existing shareholders. These new shares usually have severe redemption provisions, such as allowing them to be converted into a large number of common shares if a takeover occurs. This immediately dilutes the percentage of the target owned by the acquirer, and makes it more expensive to acquire 50% of the target's stock.
- The target takes on large debts in an effort to make the debt load too high to be attractive -- the acquirer would eventually have to pay the debts.
- The company buys a number of smaller companies using a stock swap, diluting the value of the target's stock.
- The target phrases all its employee's stock option grants to ensure they immediately become vested if the company is taken over. Many employees can then exercise their options and then dump the stocks. With the release of the "golden handcuffs", many discontent employees may quit immediately after they've cashed in their stock options. This poison pill is designed to create an exodus of talented employees. In many high-tech businesses, attrition of talented human resources often means an empty shell is left behind for the new owner.
- Peoplesoft guaranteed its customers in June 2003 that if it were acquired within two years, presumably by its rival Oracle, and product support were reduced within four years, its customers would receive a refund of between two and five times the fees they had paid for their Peoplesoft software licenses. The hypothetical cost to Oracle was valued at as much as US$1.5 billion. The move was opposed by some Peoplesoft shareholders who believed the refund guarantee flagrantly opposed their interests as shareholders. Peoplesoft allowed the guarantee to expire in April 2004.
It was reported in 2001 that since 1997, for every company with a poison pill that successfully resisted a hostile takeover, there were 20 companies with poison pills that accepted takeover offers.
The trend since the early 2000s has been for shareholders to vote against poison pill authorization, since, despite the above statistic, poison pills are designed to resist takeovers, whereas from the point of view of a shareholder, takeovers can be financially rewarding.
2 Politics
A poison pill may also be used in politics, such as attaching an amendment so distasteful to a bill that even the bill's supporters are forced to vote against it. This manipulativeAnatomy In the context of joints, manipulation is the forceful, passive movement of a joint beyond its active range of motion. Manipulation does not imply specificity or the correction of the vertebral subluxation, and therefore is not synonymous with the tactic may be intended to simply kill the bill, or to create a no-win situation for the bill's supporters, so that the bill's opponents can accuse them of voting for something bad no matter what.
In the U.S., it may also refer to a stipulationA stipulation is an agreement made between two parties in legal proceedings. Stipulations remove points of contention so that progress can be made during the proceedings. often attached to constitutional amendmentA constitutional amendment is an alteration to the constitution of a nation or a state. In jurisdictions with 'entrenched' constitutions this requires a special procedure different from that used for enacting ordinary laws. Flexible constitutions A flexibs, which kills the amendment if it has not been ratifiedRatification is the process of adopting an international treaty, or a constitution or other nationally binding document (such as an amendment to a constitution) by the agreement of multiple subnational entities. The process of ratifying a constitution is after seven years.
