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Poison Pill (Meaning: All You Need To Know)

What does Poison Pill mean?

How do you define Poison Pill in simple terms?

What’s essential to know?

Keep reading as I have gathered exactly the information that you need!

Let me answer the question of what poison pill means once and for all!

Are you ready?

Let’s get started!

What Is A Poison Pill

The term “poison pill” is attributed to this strategy as it symbolically refers to a “pill” that is difficult to swallow.

In essence, by using a poison pill technique, a company subject to a hostile acquisition can dilute its equity in such a way that it will make it more difficult and more expensive for the acquiring company to fully execute its acquisition strategy.

Poison Pill Definition

According to The Corporate Finance Institute, a poison pill in business is defined as follows:

The poison pill technique, sometimes also known as a shareholder rights plan, is a form of defense against a potential hostile takeover.

As you can see, a poison pill is a defensive strategy or technique used by companies to defend against hostile takeovers.

Poison Pill Example

Let’s look at an example of how poison pills work in practice so you can better understand what it means.

Imagine that Company A is interested in buying Company B.

Company B has a shareholders rights plan, including a poison pill provision stating that if anyone buys more than 30% of the company’s voting stock without the board’s approval, the poison pill gets triggered.

When the pill is triggered, existing shareholders (excluding the acquiring company) are allowed to buy shares at a 50% discount over the market price.

In this case, the poison pill will dilute Company A’s stock ownership in Company B and make it more expensive for it to buy it out by purchasing a majority share of the voting stock.

Other Definition

In other words, a poison pill can refer to a poisonous pellet that a person may ingest leading to the person’s death.

Poison pills were used by soldiers who chose to commit suicide instead of getting captured or tortured by the enemy.

Spies also may have carried poison pills, typically made of fast-acting cyanide, in case they were captured and were forced to reveal secret or sensitive information.

Poison Pill Meaning Takeaways 

So there you have it folks!

What are poison pills?

How do you define poison pill?

The term poison pill is generally used as finance slang referring to a business strategy deployed by a company to deter another company from pursuing a hostile takeover.

When defined literally, a poison pill refers to a pellet that results in the death of a person when ingested.

I hope I was able to answer the question what does poison pill mean and how is it defined!

Good luck!

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