Poison put provisions, which are commonly found in loan agreements and bond indentures, trigger full payment of the debt at face value upon certain events such as a change in a majority of the board of directors unless a majority of the new board consists of incumbent directors or directors approved by the incumbent directors. These provisions are termed “poison puts” or “poison proxy puts” because they can have the same effect as a “poison pill” by discouraging hostile takeovers or acquisitions and entrenching directors, while also having the same effect as a put by requiring a party to pay higher than market value for the bonds.
These provisions are usually intended to protect lenders by providing the lenders with input on hostile takeovers that could significantly alter the financial condition of the target, helping to ensure the lenders continue to get the type of credit risk they originally bargained for.1 However, poison put provisions also have the potential effect of making the target less attractive to a corporate raider or a white knight by imposing costs on a change in control.2
