TLDR:
A poison pill is a shareholder rights plan that makes a hostile takeover prohibitively expensive by allowing existing shareholders (except the acquirer) to buy additional shares at a discount when a large stake is acquired.
Poison Pill Evolution
The rights plan (poison pill) has evolved significantly since its invention by lawyer Martin Lipton in 1982. Early pills were designed to be permanent defenses; modern institutional investor norms have pushed boards toward time-limited pills (typically 1-3 years) that require shareholder reauthorization to continue. ‘Selective’ or ‘grandfathered’ poison pills can discriminate between shareholders — allowing a specific beneficial owner to hold above the trigger threshold while the pill remains in effect for other acquirers.
Proxy advisory firms have significant influence on shareholder votes regarding poison pill adoption and renewal. ISS and Glass Lewis’s poison pill guidelines set de facto governance standards that most large US public companies follow. For public company boards adopting pills in response to a specific takeover threat, obtaining a legal opinion on the pill’s validity, conducting a proper process for adoption, and preparing to defend the pill’s business justification to shareholders are all essential steps.