Poison Pill

A poison pill is a defence measure against hostile takeovers. It makes it expensive or unattractive for an unwanted buyer to acquire the company, for example by issuing additional shares. This allows management to resist an unwanted takeover. The basic form familiar from the US uses a rights plan: once a buyer crosses a specified ownership threshold, the other shareholders may purchase additional shares at a steep discount. The buyer triggering the plan is excluded. Its stake is therefore substantially diluted, potentially making further purchases economically unattractive.

A rights plan is intended to make an acquisition without engagement with the board more difficult. Depending on its terms, the board may redeem the rights or grant an exemption for an agreed transaction. This creates time to assess the offer, negotiate a higher price or seek alternative buyers. Shareholders may benefit if an inadequate offer is improved. However, a plan can also prevent an attractive acquisition and primarily protect the position of incumbent management.

US-style rights plans cannot simply be transferred to Germany. Rules on issuing new shares, equal treatment of shareholders and restrictions on defensive action during a takeover offer limit the available options. Seeking a friendly competing bidder or presenting a convincing case for the company's standalone value may therefore be more relevant in practice. Such measures are not automatically poison pills themselves.

For a buyer, reviewing existing rights plans forms part of preparing an offer. The key issues are the ownership threshold triggering the plan, any exemptions and the conditions under which the board can remove it. These determine whether to approach the board first, how much time to allow for the transaction and how credible the route to the intended level of control is. The economic question is whether the plan supports a better outcome for shareholders or mainly makes a change of control harder.