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How to prevent hostile takeovers by issuing preferential stocks? Revealing the mysterious operation of poison pills!
From a business perspective, hostile takeovers are a major threat to companies. One of the tools to combat such a takeover is the "poison pill" plan, which can effectively protect the company's independence. Through this strategy, a company's board of directors is able to issue preferential stock, expand the equity of existing shareholders, and thus increase the cost of the acquisition, discouraging potential acquirers.
The origin and evolution of poison pills
The "poison pill" strategy was first proposed by lawyer Martin Lipton in 1982. Its purpose is to counter hostile takeovers for the purpose of acquisition. This strategy has become a classic weapon against corporate takeovers. The use of poison pills became more popular in the 1980s, thanks to the rise of corporate raiders like T. Boone Pickens and Carl Icahn.
The concept of the poison pill originated from the poison that spies would use when they were captured in order to avoid interrogation after capture.
According to the report, since 1997, some companies with poison pill plans have successfully resisted hostile takeovers, but relatively speaking, such companies have also seen more takeovers during the same period, making poison pills more vulnerable. question.
How poison pills work
The poison pill works in a clever way, by issuing preferential stock to reduce the chances of a hostile takeover being successful. When a shareholder's shares reach a certain proportion (for example, 20%), other shareholders can purchase additional shares at a preferential price. This would significantly increase the cost of gaining control.
When other shareholders are able to purchase more shares at a discount, the acquirer's stake will be diluted, making acquisitions more difficult and expensive.
This plan can only be implemented and revoked by the board of directors, which means that the acquirer must negotiate with the board of directors in the future in the hope of revoking the plan.
Various types of poison pills
Specific types of poison pills include but are not limited to:
Preferred Stock Plan
Under this strategy, the target company issues a large number of new shares, usually preferred shares, to existing shareholders in order to increase the acquirer's costs.
Flip to buy
By allowing non-buying shareholders to purchase additional shares at a discounted rate, an immediate increase in capital is achieved, making a takeover more difficult.
Backend Rights Plan
Once an acquisition occurs, employees' options take effect immediately, which may lead to a large number of employees leaving and further weaken the company's value.
Many analysts point out that companies with poison pill plans usually receive higher acquisition premiums when faced with takeovers.
Legal status and restrictions
The legal status of poison pills is not stable, and as the legal norms of different countries change, the laws of some regions may restrict their use. In the United States, in the 1985 case of Moran v. Household International, Inc., the Delaware Supreme Court recognized poison pills as a legitimate takeover defense tool.
Other countries
In Canada, the poison pill is mostly “chewable,” meaning the acquirer can proceed with the acquisition as long as they meet certain requirements. In the UK, the use of poison pills is banned under trading panel rules.
The future of the poison pill and its impact
As technology and global markets change, the behavior patterns and application scenarios of poison pills are also evolving. Today's companies face diverse models and backgrounds, and whether the poison pill plan can effectively achieve its purpose remains to be further tested.
ConclusionThe use of poison pills has sparked controversy in the business world. While it can indeed enhance a company's defense against hostile takeovers, it can also have a negative impact on the company's operating efficiency. Is this defense mechanism protecting the enterprise or causing it to stagnate? This is something we should think deeply about.
