The poison pill is an antitakeover device developed by takeover expert Martin Lipton, a New York attorney.
Lipton says it is designed to give management the time it needs to fight coercive hostile takeover bids and the power to ensure that all stockholders get the same price for their shares in a buyout. But critics, including the SEC, say the poison pill is so potent that it usurps fundamental shareholder rights by giving management the power to veto unfriendly takeover bids without shareholder participation.
Household International Inc.'s poison pill basically works like this: the company's stockholders were given the right, under certain conditions, to receive $200 worth of a hostile bidder's stock for only $100. That right was triggered if a hostile bidder either bought 20 percent of Household or made a tender offer for 30 percent. This poison pill provision discourages hostile takeover bids because the price of acquiring Household automatically increases from about $2 billion to $8 billion, according to lawyers familiar with the pill's impact.
Opponents of the pill say that since the directors of Household retain the power to rescind the poison pill relatively cheaply if they want to be acquired by a friendly partner, the provision forces a bidder to negotiate directly with the company's board, rather than taking its offer to shareholders.