announcing a plan that would allow shareholders to purchase additional stock.
The company’s board has unanimously adopted a so-called shareholder rights plan, also known as a “poison pill“. “The Rights Plan will reduce the likelihood that any entity, person or group gains control of Twitter through open market accumulation without paying all shareholders an appropriate control premium,” Twitter said in a statement.
What is a poison pill?
To begin with, the move taken by Twitter is not formally referred to as a “poison pill,” however, that is how the corporate world refers to it. What the Twitter board unanimously agreed upon is actually called a limited duration shareholder rights plan.
Poison pills give existing shareholders the option to buy more shares at a lower price, effectively diluting a new, hostile party’s ownership stake.
The poison pill strategy was developed by New York-based law firm Wachtell, Lipton, Rosen, and Katz in the 1980s.
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The term stems from the practice of spies carrying a poison pill that they could ingest if captured by the enemy, preventing them from extracting knowledge through torture or other means.
While the poison pill strategy is bad for all shareholders in the near term, it also makes it difficult for the hostile party — in this case, Musk — to buy all of the new shares.
Types of poison pills
The flip-in and flip-over poison pill tactics are the two sorts of strategies.
The flip-in option is the more popular of the two options.
Flip-in poison pill: Allowing all shareholders, excluding the acquirer, to purchase additional shares at a discount is known as a flip-in poison pill strategy. While purchasing additional shares offers stockholders with immediate profits, the strategy dilutes the value of the acquiring company’s limited number of shares already owned.
Flip-over poison pill: The flip-over strategy allows shareholders of the target company to purchase shares of the acquiring company at a significantly reduced price. Because it threatens to dilute and devalue the stock of the corporation attempting to take over the target, the tactic functions as a hostile takeover defence.
Twitter isn’t the first company to deploy such a strategy. Here are a few examples.
Netflix: To prevent Karl Icahn from attempting a hostile takeover, Netflix implemented a poison pill (shareholder rights plan) in 2012. Netflix instantly went on the defensive after learning that Icahn had purchased a 10% stake in the company. Any attempt to purchase a big ownership position in Netflix without board approval would result in a flood of new shares into the market, making any investment acquisition extremely costly.
Papa John’s: The poison pill was also adopted by the board of Papa John’s in July 2018 to prevent ousted founder John Schnatter from regaining control of the company. Schnatter was the company’s largest stakeholder, holding 30% of the company’s equity.
