What is a Flip-In Poison Pill?

A poison pill is a defense technique used by a target company to shield itself from been acquired in a hostile takeover. There are different tactics used by companies to foil the attempt of an acquiring company to takeover a target company. A flip-in poison pill is a strategy used by target companies to shield against a hostile takeover, using this strategy, the shares of the target company are diluted making the takeover difficult. A flip-in poison pill is a strategy in which the existing shareholders of a target company are allowed to buy the shares of the company at a discount, thereby diluting the shares already purchased by the acquiring company.

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How Does a Flip-In Poison Pill Work?

Not all target companies use the flip-in poison pill as a defense mechanism against hostile takeovers. However, some companies have the flip-in poison pill provision embedded in their byelaws. Using a flip-in poison pill requires that a target company floods the market with new shares which can only be purchased by its existing shareholders as a discount. When this happens, all shares formerly purchased by the acquiring company have less value, thereby hostile takeover becomes difficult to achieve. It is important to note that existing shareholders can purchase newly issued shares at a discount before the actual day of the takeover. There is a threshold of shares that an acquirer can obtain from a target company, if he surpasses the threshold, the target company can opt for a flip-in poison pill to foil the takeover attempt. The 2004 flip-in poison pill which involved PeopleSoft and Oracle Corporation is a popular example of the usage of flip-in poison pill. Using this strategy, PeopleSoft made the takeover attempt by Oracle corporation extremely difficult, shareholders and investors of PeopleSoft were also duty compensated during this period. Although, Oracle sought to dissolve the flip-in poison pill through the court but it was quite difficult to attain.

Flip-In vs. Flip-Over Poison Pill

Flip-Over poison pill is the opposite of flip-in poison pill. While flip-in poison pill allows existing shareholders to purchase shares of the target company at a discount, flip-over poison pill allows existing shareholders to purchase the shares of the acquiring company at a discount. A flip-over poison pill strategy is only used when a hostile takeover is at hand and its provision must be embedded in the bylaws of the acquiring company.