Flip-In Poison Pill

See: Poison Pill. See: Pacman Defense.

A flip-in poison pill is a strategy designed to protect a company’s shareholders if that company becomes an acquisition or takeover target.

Essentially, a flip-in poison pill provision allows existing shareholders in a company to purchase additional shares at a discount when faced with a takeover by another entity. This sends a message to any would-be hostile acquirers that the company is prepared to defend its shareholders and potentially flood the market with shares, thus making it more financially difficult for the acquirer to gain control of the company.

In order to take over a public company, the wannabe acquirer has to get its mitts on a voting majority of the company’s stock shares. (Often only a third or so of the total shares even cast any vote, so control can be had, often, with just 20-30% of the shares outstanding...or less.) If some entity is making noise about taking over our DIY home tattoo gun business, we can try and make it impossible for them to do so by creating a bunch more shares, and offering them to existing shareholders at a discount. With all those new shares, it’s a lot harder for one person or organization to buy up the 51% of shares needed to take us over.

Organizations can’t just decide to adopt this strategy on a whim. It has to be part of the company’s bylaws prior to the takeover. And even then it doesn’t necessarily mean the company won’t end up in court defending its flip-in poison pill provisions against the wannabe acquirer.