Have you heard of the phrase “poison pill”?

Well if you have not, you would have heard that Elon Musk wants to buy over twitter in what appears to be a hostile takeover. Elon can at best be described as an activist investor/shareholder in twitter.

An activist investor is an individual or group that buys a significant stake in a public company in order to influence how the company is run, oftentimes by obtaining seats on its board of directors or even out-rightly taking over the company like Elon is trying to do now.

You may not however know that twitter is poised to block that move with the poison pill technique.

So what is the poison pill technique (also known as a shareholder rights plan)?

It is a strategy sometimes employed by target companies in a take-over bid to reduce the attractiveness of their shares to the company intending the take-over. This is often done by enlarging the outstanding shares of a target company through a new issue of shares to its shareholders at a discount to the market price, thereby making the take-over more expensive to the company intending to take it over.

The general idea, is to frustrate an external takeover attempt by either making the company less desirable or by putting current shareholders at a higher point of power. Both goals are achieved by selling cheaper shares to existing shareholders, thus diluting the potential equity which an acquirer receives, and also providing more equity to existing shareholders.



The company makes provision to entitle existing shareholders to acquire shares of the company at a very substantial discount and allowing existing shareholders to consolidate their equity claim in the portion of the company that is not bought by the acquirer.

This right to purchase is given before the takeover or acquisition is finalized, and will often be triggered when the acquirer surpasses a certain ownership percentage threshold.

The purchase of discounted shares of the company then dilutes the acquirer’s equity, reducing the value received for the price paid by the acquirer.

This puts all shareholders almost at par when it comes to board votes because each shareholder now owns less of the overall company. The trick however is that existing shareholders (excluding the acquirer) will have effectively consolidated power due to the purchase of discounted shares and as a block defeat the majority of the acquirer.

When the option is exercised before the acquisition, it is  referred to as  a flip-in and where it is  exercised after the acquisition it is  referred to a flip-over.

In 2012 Netflix adopted this technique to fend off Karl Icahn from a hostile takeover as soon as Icahn acquired 10% stake in the company.  They went on the defensive by adopting this approach and  making the attempt much more expensive for Icahn.


Poison pills can be very effective in frustrating a purchase but shouldn’t be the first line of defence. This is because the strategy is not fool-proof  and may not always work, as it may not deter a determined acquirer especially one like Elon Musk in this instance. It may also weaken the company if deployed incorrectly.

This approach has not found increased expression in Nigeria but remains an option for companies seeking to ward off hostile takeovers by people who have substantial shareholding and intend to use their large investment in a company as a tool to takeover and control it.


Although the poison pill technique is a a measures that a company may implement to discourage a hostile takeover, they do not always mean that companies do not want to be acquired or merged. Sometimes they are used to force the acquirer to negotiate takeover terms more favorable for the target company.

Omoruyi Edoigiawerie is a Business Lawyer and the Lead Partner at Edoigiawerie & Company LP, a full service law firm offering bespoke legal services with a focus on startups, established businesses and upscale private clientele.  The content of his article is intended to provide a general guide on the subject matter. Specialist advice should be sought about specific circumstances. He can be reached by email at omoruyi@uyilaw.com.