Introduction Financial and legal experts concur that one of the strongest anti- takeover defense approaches is a shareholder rights strategy (or, in more informal terms, a poison pill)[footnoteRef:1],[footnoteRef:2]. Though the particulars differ based on strategic implementations, the elementary defense tool offers extant shareholders (with the exception of hostile bidders) the right to purchase stocks authorizing them to obtain new shares at considerably low rates, in case a hostile bidder gets his hands on more than a specific amount of the outstanding shares of the organization[footnoteRef:3]. Consequently, poison pills accord the directorial board the capability of significantly diluting hostile bidders’ ownership stake, according board members effective veto power to suppress hostile acquisition attempts. In this paper, the subject of how accountants handle poison pills will be addressed, including a summary of the poison pill, courts’ response to it, latest attempts at poison pills, and its impacts on organizational value as well as long- term influence on balance sheet and earnings. [1: Martijn Cremers and Allen Ferrell. "Thirty years of shareholder rights and firm value." The Journal of Finance 69, no. 3 (2014): 1167- 1196.] [2: Matthew R. Denes, Jonathan M. Karpoff, and Victoria B. McWilliams. "Thirty years of shareholder activism: A survey of empirical research." Journal of Corporate Finance 44 (2017): 405- 424.] [3: Eliezer M. Fich, Jarrad Harford, and Adam S. Yore. "Does takeover protection matter? Evidence from a natural experiment." Evidence from a Natural Experiment (April 2, 2018) (2018).]

Overview of the poison pill

Poison pills are a type of defense approach target organizations employ for dissuading hostile takeover attempts by acquirers. As suggested by the name, a poison pill approach resembles something hard to tolerate or swallow – targeted organizations adopt such an approach for rendering their shares disadvantageous to acquirers. A poison pill drastically increases acquisition costs, creating large disincentives for entirely deterring such attempts[footnoteRef:4]. Such a tool helps safeguard minority shareholders, besides preventing changes to organizational management or control. However, its implementation doesn’t invariably suggest that the organization is totally against acquisition; it could also be employed for obtaining greater valuation or better acquisition terms. [4: Fred J. Weston, and Kwang S. Chung. "Takeovers and corporate restructuring: An overview." Business Economics (1990): 6- 11.]

The origins of the term, poison pill, may be traced back to the spying and war era, when undercover workers bore poison pills on their person to swallow in the event they were bound for capture. Likewise, target organizations adopt poison pill approaches for preventing hostile takeovers. The earliest usage of the term within the corporate finance domain is attributed to the US[footnoteRef:5]. Such strategies have deliberate harmful impacts for aggressive acquirers bent upon taking over an organization. [5: Richard S. Ruback. "An overview of takeover defenses." In Mergers and acquisitions, pp. 49- 68. University of Chicago Press, 1987.]

With respect to acquisitions and mergers, the poison pill idea was first formulated during the early 80s, for preventing bidding takeover organizations against direct negotiations of share sales with shareholders, coercing them into negotiating only with the directorial board. Poison pills are normally board- issued plans in warrant form or an alternative connected to extant shares[footnoteRef:6]. No other entity in the organization but the board has the right to revoke them. [6: Ibid, at 49- 68]

Organizations employ every means at hand for improving their market share, including acquisitions, mergers, and strategic alliances with fellow organizations belonging to the same sector/ market. Rival firm acquisition is one means of doing away with or decreasing one’s competition in the market. But target organizations’ management team, founding members and owners generally prefer to maintain control over the company for multiple reasons including more lucrative terms, emotional affinity, or greater valuation, among other things[footnoteRef:7]. They might try to quash acquisition offers by rival organizations. In the absence of a favorable reaction on the part of target organizations’ managers, rival firms wishing to acquire the organization might adopt the tactic of taking over the organization through directly approaching corporate shareholders or striving for management replacement to gain approval for the acquisition effort. These tactics are considered hostile attempts at takeover. As shareholders – who, in effect, are company owners – are entitled to give their majority vote in favor of acquisition, target organizations’ management team employs a special poison pill or shareholder rights plan; this is a structural organizational development plan that has particular conditions integrated into it with the specific purpose of foiling take- over attempts. [7: Dana J. Johnson and Nancy L. Meade. "Shareholder wealth effects of poison pills in the presence of anti- takeover amendments." Journal...

Co- founder, Martin Lipton, came up with this defense approach in a 80s takeover battle. His client – General American Oil – was targeted by T. Boone Pickens. Lipton recommended a reduction in corporate share value through creating an excess of new shares[footnoteRef:8], diluting Pickens’ coveted ownership and dissuading the unwanted acquirer. [8: David S. Newman, "Delaware Serves Shareholders the" Poison Pill": Moran v. Household International, Inc." Boston College Law Review 27, no. 3 (1986): 641.]
Ever since Lipton’s implementation of this approach, a number of approaches have been formulated, all incorporating the common idea of deterring external hostile takeover efforts through making the organization less favorable for acquirers or increasing the power of extant shareholders[footnoteRef:9],[footnoteRef:10]. Both may be achieved through selling inexpensive shares to extant shareholders, thus diluting the equity a hostile acquirer is likely to receive, in addition to increasing equity for extant shareholders. [9: Ibid, at 641] [10: Moran v. Household, 500 A.2d 1346 (Del. 1985).]

The Flip- In Provision

This type of approach entails enabling all shareholders, with the exception of the acquirer, to purchase extra discounted shares. Though regular investors buy additional shares to gain instant profits, this results in the dilution of the share value of acquirer shares. Such purchase rights are accorded to shareholders prior to finalization of the takeover, and are commonly triggered after acquirer accumulation of a specific threshold share percentage of...…57. (2012). 1-12]

Section 172 provides organizations with a type of earnings that averages through helping companies offset prior or future earnings with NOLs. The employment of NOL carrybacks facilitates the formulation of earlier years’ tax refunds through offsetting earlier earnings with extant NOLs. It is normally possible to carry back NOLs for a couple of years, and carry them forward for a couple of decades[footnoteRef:43]. Instead of utilizing a carryback, organizations may choose to utilize a yearly irreversible carry-forward. Company NOLs are computed as follows: gross earnings less deductions; however, they encompass unlimited dividend received deduction, whilst excluding both past NOLs and all local production deductions. [43: Ibid]

Though organizations might utilize NOLs for offsetting earnings and potentially creating tax refunds, the use of NOL is dependent on companies’ capability of generating money or otherwise by employing an NOL. In case of NOL carry-forwards, NOLs’ usefulness and worth depend on future circumstances. NOLs’ perceived worth in the form of an asset has been demonstrated by financial reports. Financial accounting regulations allow NOLs to be documented on company balance sheet in the form of deferred tax assets under the FASB ASC 740 owing to its expected long-run tax savings[footnoteRef:44]. NOL deferred tax assets are valued as gross NOL amounts times effective rate of tax, unless there are concerns for long-term realization or past negative evidence. An extensive record of loss or colossal loss may be proof of weakened usage. Therefore, organizations might carry their NOLs at marginal or considerably decreased values. NOL use is marked by certainty but the potential value of the NOL provides organizations’ directorial boards with the incentive to maintain it for potential use in the future. [44: Ibid]

Conclusion

A poison pill approach is a controversial tool. But researchers provide explicit proofs supporting the theory of shareholder wealth maximization. Poison pills positively affect shareholder value since compelling abnormal returns are exhibited by the market model. This is a sound finding for the CRSP Equally Weighted Index, S&P 500, and CRSP Weighted Index in the form of market benchmark alternatives. Further, the Fama-French-momentum factor model reveals outcomes are sound and not biased by the model. Controlling for different sub-periods results in insights that extant economic situations affect stock price response. But positive market response to implementation of poison pills remains sound for all time frames. Additional examinations suggest a poor market response to regular measure implementation cases, though the threat of hostile takeover results in huge abnormal returns. Interestingly, this is the case when organizations have shortly signed friendly pacts. Although shareholders don’t attach much importance to isolation from extrinsic company control market forces, they appear to be against attempted hostile takeover. Overall, early findings reveal negative market response to implementation of poison pills. More recent researches reveal a trend of positive market response. Considering all proofs together, it may be concluded that positive abnormal poison pill implementation-connected market returns exist; hence, clearly, the shareholder maximization theory is supported. Poison pills positively impact shareholder value.

References

Journal Articles…