Twitter countered Elon Musk’s offer to buy the company for more than $43 billion with a corporate tool known as a poison pill, a defensive strategy familiar to boardrooms trying to fend off takeovers but less familiar to everyday investors. This defense mechanism was developed in the 1980s as company leaders, facing corporate raiders and hostile acquisitions, tried to defend their businesses from being acquired by another enterprise, person or group.

What is a poison pill?

  1. A poison pill is a maneuver that typically makes a company less palatable to a potential acquirer by making it more expensive for the acquirer to buy shares of the target company above a certain threshold.
  2. The strategy also gives a company more time to evaluate an offer and can give the board leverage in trying to force a direct negotiation with the potential acquirer.
  3. A poison pill is officially known as a shareholder rights plan, and it can appear in a company’s charter or bylaws or exist as a contract among shareholders.
  4. There are different types of poison pills, but usually, they allow certain shareholders to buy additional stock at a discounted price.
  5. The only shareholder blocked from making these discounted purchases is the one who triggers the poison pill.
  6. It is triggered when a person, usually the acquirer, hits a threshold for how many shares they own.
  7. If they hit that threshold, the value of their shares is suddenly diluted as other shareholders make discounted purchases.
  8. Securities experts say that investors rarely try to break through a poison pill threshold, though there are exceptions.