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Poison pill is a term referring to any strategy, generally in business or politics, to increase the likelihood of negative results over positive ones for a party that attempts any kind of takeover. It is taken from the original meaning of a literal poison pill carried by various spies throughout history, taken when discovered to eliminate the possibility of being interrogated for the enemy's gain. In publicly held companies, various methods to avoid takeover bids are called "poison pills". Takeover bids are attempts by a bidder to obtain control of a target company, either by soliciting proxies in a proxy fight to get elected to the board or to acquire a controlling block of shares and use the associated votes to get elected to the board. Once in control of the target's board, the bidder can determine the target's management. As discussed more below, targets have various kinds of takeover defenses available, and several types of defense have been called "poison pills" because they not only harm the bidder but the target (or its shareholders) as well. Currently, the most common takeover defense known as a poison pill is a shareholder rights plan. Because the board of directors of the company can redeem or otherwise eliminate a standard poison pill, it does not typically preclude a proxy fight or other takeover attempts not accompanied by an acquisition of a significant block of the company's stock. It can, however, prevent shareholders from entering into certain agreements that can assist in a proxy fight, such as an agreement to pay another shareholder's expenses. In combination with a staggered board of directors, however, a shareholder rights plan can be a potential defense.[1] The target company issues rights to existing shareholders to acquire a large number of new securities, usually common stock or preferred stock. The new rights typically allow holders (other than a bidder) to convert the right into a large number of common shares if anyone acquires more than a set amount of the target's stock (typically 20-30%). This dilutes the percentage of the target owned by the bidder, and makes it more expensive to acquire control of the target. This form of poison pill is sometimes called a shareholder rights plan because it provides shareholders (other than the bidder) with rights to buy more stock in the event of a control acquisition.[2]
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