Poison Pill
A shareholder rights plan that allows existing shareholders to buy new shares at a discount, diluting a hostile acquirer's stake.
What is Poison Pill?
A poison pill, formally known as a shareholder rights plan, is a defensive measure adopted by a company's board to deter or block hostile takeovers. When triggered — typically when any single shareholder exceeds a set ownership threshold (commonly 15–20%) without board approval — the plan allows all shareholders except the triggering acquirer to purchase additional shares at a steep discount, often 50%. This dilutes the hostile bidder's economic and voting interest, making the acquisition prohibitively expensive. Poison pills effectively give boards veto power over unsolicited bids. Institutional shareholder advisors like ISS often oppose long-term poison pills as entrenchment devices, while defenders argue they give boards time to maximize value in any change-of-control transaction.
Example
In 2022, Twitter's board adopted a one-year poison pill with a 15% threshold after Elon Musk disclosed he had acquired 9.1% of the company's shares. The pill was designed to prevent Musk from accumulating more than 15% without board approval. However, Musk subsequently made a tender offer for the whole company, and the board eventually dropped the pill and agreed to the sale.
Source: SEC — Shareholder Rights Plans