Many well-known companies such as Papa John's, Netflix, JCPenney and Avis Budget Group have used poison pills to successfully fend off hostile takeovers. And nearly 100 companies adopted poison pills in 2020 because they were worried that their careening stock prices, caused by the pandemic market swoon, would make them vulnerable to hostile takeovers.
No one has ever triggered — or swallowed — a poison pill that was designed to fend off an unsolicited takeover offer, showing how effective such measures are at fending off takeover attempts.
These types of anti-takeover measures are generally frowned upon as a poor corporate governance practice that can hurt a company's value and performance. They can be seen as impediments to the ability of shareholders and outsiders to monitor management, and more about protecting the board and management than attracting more generous offers from potential buyers.
However, shareholders may benefit from poison pills if they lead to a higher bid for the company, for example. This may be already happening with Twitter as another bidder — a $103 billion private equity firm — may have surfaced.
A poison pill isn't foolproof, however. A bidder facing a poison pill could try to argue that the board is not acting in the best interests of shareholders and appeal directly to them through either a tender offer — buying shares directly from other shareholders at a premium in a public bid — or a proxy contest, which involves convincing enough fellow shareholders to join a vote to oust some or all of the existing board.
And judging by his tweets to his 82 million Twitter followers, that seems to be what Musk is doing.
Tuugi Chuluun is an associate professor of finance at Loyola University Maryland in Baltimore, Maryland.
This article is republished from The Conversation under a Creative Commons license. You can find the original article here.