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1. Question
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Which of the following statement best describe the term ‘Poison Pill’, sometimes mentioned in the news?
Correct
Option C is correct.
"Poison pill" is a colloquial term for a defense strategy used by the directors of a public company to prevent activist investors, competitors, or other would-be acquirers from taking control of the company by buying up large amounts of its stock.
Poison pills were formally called "shareholder rights plans." Publicly listed companies across the globe often witness threats of hostile takeovers, which take place through a back-door accumulation of shares. However, with time, they have come up with varied defence mechanisms to prevent such takeovers.
Elon Musk who currently owns about 9% of Twitter shares (second biggest shareholder) made a bid to acquire Twitter and take it private to restore its commitment to free speech.
The company’s board has resisted this and deployed the “poison pill” mechanism.
The plan would allow existing shareholders, excluding the acquiring entity — Mr Musk in this case — to purchase additional shares at a discounted rate, making it difficult for the acquirer to establish a majority stake in the company.
The mechanism protects minority shareholders and avoids the change of control of company management.
Poison pills also often open the door to further negotiations that can force a bidder to sweeten the deal.
Incorrect
Option C is correct.
"Poison pill" is a colloquial term for a defense strategy used by the directors of a public company to prevent activist investors, competitors, or other would-be acquirers from taking control of the company by buying up large amounts of its stock.
Poison pills were formally called "shareholder rights plans." Publicly listed companies across the globe often witness threats of hostile takeovers, which take place through a back-door accumulation of shares. However, with time, they have come up with varied defence mechanisms to prevent such takeovers.
Elon Musk who currently owns about 9% of Twitter shares (second biggest shareholder) made a bid to acquire Twitter and take it private to restore its commitment to free speech.
The company’s board has resisted this and deployed the “poison pill” mechanism.
The plan would allow existing shareholders, excluding the acquiring entity — Mr Musk in this case — to purchase additional shares at a discounted rate, making it difficult for the acquirer to establish a majority stake in the company.
The mechanism protects minority shareholders and avoids the change of control of company management.
Poison pills also often open the door to further negotiations that can force a bidder to sweeten the deal.
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