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The stockholder rights plan, or “poison pill,” is perhaps the most well-known arrow in the quiver of defensive measures available to corporate issuers. The basic premise is simple: poison pills prevent would-be acquirors from accumulating above a certain percentage of an issuer’s outstanding stock (the “trigger”) without suffering massive dilution. This dilution occurs through either a “flip-in” provision, in which unaffiliated stockholders can purchase the issuer’s stock for half price once the pill is triggered, or a “flip-over” provision, in which the issuer’s unaffiliated stockholders can acquire discounted stock of the acquiror in any merger or business combination.

The poison pill was devised as a tool to deter 1980s-style coercive takeovers, which originally came in the form of two-step, front-loaded tender offers coercing stockholders into tendering for reasons unrelated to the economics of the offer. As the Delaware Court of Chancery recently explained, “[t]he primary purpose of a poison pill is to enable the target board of directors to prevent the acquisition of a majority of the company’s stock through an inadequate and/or coercive tender offer.” In re Gaylord Container, 753 A.2d 462, 481 (Del. Ch. Jan. 26, 2000). Thus, “[t]he pill gives the target board leverage to negotiate with a would-be acquiror so as to improve the offer as well as the breathing room to explore alternatives to and examine the merits of an unsolicited bid.” Id.

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