Of late, If there’s one buzzing word in the financial world that everyone is talking about, That would most likely be the term “ Poison Pill”
Those who are active on twitter would probably know what I’m talking about. Elon Musk, The richest man on the planet is not only trying to take over twitter with his posts, comments and the controversies that come around with it, but he has taken this trolling to a next level when he conducted a poll whether there should be any changes in twitter going forward - When the result of this poll was Yes. He then pulled a move that only he could have pulled off - He silently bought 9% stake in Twitter and became the largest single shareholder - What followed next was the usual board room stuff that happens - Twitter trying to welcome Elon to the board and Elon being clear with his objectives which the board were not clearly in consonance with. Elon then came up with an offer to buy 100% of twitter for 43 Billion Dollars. The Twitter board then came up with the Poison Pill to avoid any hostile takeover from Elon.
What is a Poison Pill Strategy ?
The word finds its roots in the world of espionage, where the spies are to take cyanide capsules in case they are captured by the enemies.
It is basically a defensive strategy of last resort (originated in the 1980’s ) used by the companies when there is a possibility of hostile takeover by competitors or other outsiders.
How does it work ?
In this strategy, Shareholders (except for the one who is trying to acquire) are allowed to buy shares of the company at a deep discount. This right to purchase is given to the shareholders before the takeover is finalized and is often triggered when the acquirer amasses a certain threshold percentage of shares of the target company.
For example : Some companies may choose to implement this strategy when the acquirer takes 30% of the shares. In the case of Twitter, This clause is triggered when an entity or person has acquired more than a 15% stake in the company without the board’s approval.
Effect of this strategy ?
It leads to Share value dilution.
Discourages Institutional investors to buy such companies.
In some cases, it protects the rights of the minority shareholders.
It significantly raises the cost of acquisition.
Examples from the past ?
In July 2018, the board of restaurant chain Papa John’s \voted to adopt the poison pill to prevent ousted founder John Schnatter from gaining control of the company. Schnatter, who owned 30% of the company’s stock, was the largest shareholder of the company.To repeal any possible takeover attempts by Schnatter, the company’s board of directors adopted a Limited Duration Stockholders Rights plan—a poison pill provision. Dubbed the wolf-pack provision, It essentially doubled the share price for anyone who attempted to amass more than a certain percentage of the company’s shares without board approval.
The New York Times reported that the plan would take effect if Schnatter and his affiliates raised their combined stake in the company to 31%, or if anyone purchased 15% of the common stock without the board’s approval.
Since Schnatter was excluded from the dividend distribution, the tactic effectively made a hostile takeover of the company unattractive: the potential acquirer would have to pay twice the value per share of the company’s common stock. It prevented him from trying to take over the company he founded by buying its shares at market price.
In 2012, Netflix announced that a shareholder rights plan was adopted by its board just days after investor Carl Icahn acquired a 10% stake. The new plan stipulated that with any new acquisition of 10% or more, any Netflix merger, sales, or transfer of more than 50% of assets, allows for existing shareholders to purchase two shares for the price of one.
Source : Investopedia
Hostile Takeovers in India
Here are some of the cases of Hostile takeovers in India. Latest one being L&T’s acquisition of Mindtree
What’s the Status of Poison Pills in India ?
In India, Currently, the legal framework does not expressly bar the poison pill, but concomitantly, does not facilitate its adoption by the entities.
The below article is a nice read on poison pills.
What are your views on this strategy? And should this be allowed in India ?