Re-examining the Poison Pill

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Frank Voisin is a value investor and independent analyst whose site, Frankly Speaking, contains Frank’s investment theses as well as educational material to help investors avoid value traps. Subscribe to Frank’s feed here.

The poison pill, also known as a shareholder rights plan, is a defensive tactic used by companies to defend against hostile takeovers. The poison pill allows current shareholders to buy more shares at a massive discount, which would increase the cost of an acquisition. This forces bidders to negotiate with the company’s board of directors, rather than going directly to shareholders. For value investors, it is important to consider the presence of poison pills, because a potential catalyst – an acquisition of the undervalued company – is eliminated.

The question is again, who decides? A board has the responsibility of running a company. But the shareholders are the ultimate owners of the company. In the J. C. Penney case, the poison pill is chilling discussions about the company’s future. In the Airgas case, the poison pill is being used to prevent shareholders from deciding themselves.

NYTimes’ Dealbook published a great article about several recent court cases involving poison pills and the future judicial interpretation of how poison pills may be used. It is an interesting read and you can check out the full article here.

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