The Poison Pill: An Analysis of the Diffusion of the Shareholder Rights Plan Analytical Essay
The Poison Pill: An Analysis of the Diffusion of the Shareholder Rights Plan
An analysis of how and why the poison pill, a hostile takeover defense mechanism legally termed the shareholder rights plan, diffused across corporations in the late 1980s.
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| 2014
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"1980s corporate America saw a wave of hostile takeovers due to relaxed antitrust enforcement, resulting in unprecedentedly large mergers. New defense mechanisms requiring board approval was a response to corporations' newfound sense of vulnerability (Coffee 1988).One of these defenses, the shareholder rights plan--more commonly known as poison pills--saw rapid diffusion across most major corporations within five years of its introduction. Its diffusion was first established by firms' desire to gain legitimacy but was expedited by interlocking directorates; hence, a blend of neoinstitutionalist and network theories within the broader institutional environment explains its adoption."The poison pill was created by attorney Martin Lipton and adopted by boards across major corporations in the 1980s as one of several defenses against hostile takeovers. Theoretically, the poison pill allowed holders to buy shares of a firm at a major discount, usually 50%, if a takeover attempt were to occur without board approval (Strang & Soule 1998).Thus, any tender offers not approved by the board would become prohibitively expensive by "poisoning" the target with the financial obligations of the poison pill (Strang & Soule 1998). In practice, poison pills are rarely triggered but intended to encourage potential acquirers to negotiate with the board (Dawson 1987).The poison pill quickly diffused nationally. In July 1984, the first major corporation to adopt the poison pill was Crown Zellerbach. After the 1985 Moran v. Household case unambiguously established the legality of this defense, adoption of the poison pill began in earnest. Whereas around 5% of Fortune 500 companies in 1986 implemented poison pills, merely three years later, over 60% of these firms had adopted it. The poison pill arose from being a "deviation" to a "norm of corporate governance" (Davis 1991:587).Furthermore, its diffusion was not concentrated to certain geographies or industries, as it occurred on a national scale without clustering in specific markets (Gerstein 2009)."
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The Poison Pill: An Analysis of the Diffusion of the Shareholder Rights Plan (2014, June 15)
Retrieved April 02, 2023, from https://www.academon.com/analytical-essay/the-poison-pill-an-analysis-of-the-diffusion-of-the-shareholder-rights-plan-153901/
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"The Poison Pill: An Analysis of the Diffusion of the Shareholder Rights Plan" 15 June 2014.
Web. 02 April. 2023. <https://www.academon.com/analytical-essay/the-poison-pill-an-analysis-of-the-diffusion-of-the-shareholder-rights-plan-153901/>