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Top2. The Poison Pill: A Brief Overview
The Shareholder Rights Plan is a euphemism for what is usually referred to as a poison pill. A poison pill is a corporate doomsday device aimed at protecting the firm against an unwelcome takeover attempt (Ryngaert, 1988). If an acquiring party – usually referred to as the bidder - is on the verge of making a hostile bid, that is, one not approved by the board, the pill triggers the issuance of a large number of shares to friendly investors only, at a steep discount from market value. The effect is to dilute the ownership stake and market value of the bidder. In the end the cost of the acquisition becomes much higher than initially anticipated (Malatesta & Walkling, 1988). The pill has the effect of deterring unwanted bids. Hostile bidders can be other corporations, individual investors known as corporate raiders, dissident shareholders, and even the incumbent management team.
In general, poison pills are adopted by the board, and most often shareholders have little control over them. Martin Lipton, a lawyer with the New York-based firm of Wachtell, Lipton, Rosen, and Katz is widely credited with having invented and used a first version of the poison pill in 1982 (Wachtell, Lipton, Rosen, & Katz, 2010).