Legal Definitions - poison pill

Definition: A poison pill is a tactic used by a company to protect itself from a hostile takeover. When a company is being targeted for a takeover, it can issue new shares of stock that give special rights to the holders. These rights can make the company less attractive to the buyer, or more expensive to acquire.

Example: Let's say Company A wants to take over Company B. Company B's board of directors decides to implement a poison pill by issuing new shares of stock that give the holders the right to buy additional shares at a discounted price. This makes it more expensive for Company A to acquire Company B, and less attractive to its shareholders.

Explanation: The poison pill is a defensive strategy that makes it harder for a hostile bidder to take over a company. By issuing new shares of stock with special rights, the target company can make itself less attractive to the buyer, or more expensive to acquire. This gives the target company more time to find a better deal, or to negotiate better terms with the buyer.