In corporate takeover defense, what is a poison pill designed to do?

In corporate takeover defense, a poison pill is designed to make a takeover more expensive for an unwanted bidder.

The formal name for this tactic is a shareholder rights plan. A company’s board can adopt provisions that allow existing shareholders, other than the acquiring investor, to buy additional shares at a discount if a bidder crosses a specified ownership threshold. The resulting dilution makes it harder and more costly for the bidder to obtain control.

Poison pills are intended to give directors bargaining time and leverage, rather than automatically preventing every acquisition. A board may use that time to seek a higher offer, find another buyer, or persuade shareholders that the bid undervalues the company. The plan can usually be redeemed or withdrawn by the board under its terms.

The phrase does not refer to an illegal act or an actual chemical. Courts and regulators have examined these plans because they affect shareholder rights and the authority of directors. Their legality and operation depend on the jurisdiction and the specific plan.