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What is meant by a poison pill, in corporate management? Give an example of how the...

What is meant by a poison pill, in corporate management? Give an example of how the concept is applied.

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Expert Solution

In corporate management a poison pill is a strategy applies by the target company to prevent hostile takeover. Under this strategy, the target company makes its shares unattractive and increases the cost of acquisition to such an extent that the acquirer is no longer interested in acquiring the company. There are two types of poison pills-Flip In and Flip Over. Under Flip In, shareholders other than the acquirer, allowed to Purchase the shares of the target company at a discount. This dilutes the ownership of the company. Under Flip Over strategy, owners of the target company are entitled to purchase the shares of the acquiring company at a high discount, if the hostile takeover succeeds.

Example: Papa John’s International company used the strategy to avoid takeover by the largest shareholder. It distributed dividend of one right per share to the other shareholders thus diluting his stake in the company.


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