Corporate Governance: The Poison Pill Defense

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There are as many ways to acquire control of a corporation and just as many takeover resistance tactics that can be used by management. If a tender offer, or takeover, of a corporation is attempted that management wants to "go away," the poison pill is one of the terms used to describe a particular type of anti-takeover defense.

Right to Redeem or Buy

The poison pill involves pre-arranging a shareholder right to redeem or buy a significant amount of stock that is triggered by a tender offer. Designed to make the company less attractive, the redemption or buy-back price is generally at unfavorable high prices to the corporation. This dilutes the stock value by reducing cash or cash-related assets.

Acquisitions vs. Mergers

A target company is more likely to raise the poison pill defensive strategy against an attempted acquisition than a merger. In an acquisition, change can be both brutal and swift as the acquirer imposes its financial restraints and operational control systems on the target. In mergers, parties tend to be more evenly matched, with power dynamics of the combinations being more ambiguous and integration more drawn out.

Talbot's Poison Pill

The women's clothing retailer Talbot adopted a poison pill tactic in August 2011 after learning that Sycamore Partners, a private equity firm, had acquired a significant stake in the company. Talbot's plan triggered when an investor acquired 10 percent or more of outstanding common stock in the company, creating a "dividend of the right to buy one share for each outstanding share," as reported by The New York Times.

Shareholder Disclosures

Management frequently learns that a concentrated stake in a corporation has occurred because of Securities and Exchange Commission disclosure requirements. Under the Williams Act of 1968, which amended the Securities and Exchange Act of 1934, outside shareholders must disclose company holdings within 10 days of acquiring 5 percent or more of outstanding stocks. As a response to a wave of hostile takeover attempts, the Williams Act was enacted by Congress to provide shareholders adequate information to respond to a tender offer.

Further Resources:

• The New York Times: Talbots Adopts Poison Pill
• United States Securities and Exchange Commission: Form 8-A, The Talbots, Inc.
• Washington and Lee Law Review: The SEC's Proposal to Regulate Market Sweeps