M&A
Poison Pill in M&A the US vs Europe
The “poison pill” (formally known as a shareholder rights plan) is significantly more common in U.S M&A transactions, especially hostile takeovers, than in European M&A. Here's a breakdown of what it is, and how and why it functions so differently in the US and in the EU.
What is a poison pill?
Simply put, a poison pill is an action from, or setup by, a company that serves to make it less attractive for an investor/shareholder to gain control over. It is used to defend against so called hostile take overs and is typically driven by management not wanting to be replaced in a change of control situation.
Check out Poison Pill US vs EU.
Why poison pills are common in the U.S.
1. Corporate law permits it broadly
The U.S. has a long history of hostile M&A activities and this has served to make defensive tactics more routine and accepted. Investment banks, activists, and PE firms regularly use hostile bids as a strategy—boards need a defense playbook, and the same actors may also be on the supporting end of a poison pill strategy when it serves their purpose (most likely as a minority stakeholder, potentially intending to “stake build” in the long-term) the best.
Delaware corporate law, which governs many U.S. companies, allows boards a wide discretion to adopt poison pills (and many other corporate actions) without shareholder approval. The board of directors and the management team of a U.S. corporation has more autonomy compared to a board of directors and a management team in a European company, as will be outlined in the following sections.
Boards can act preemptively to fend off unwanted bids and justify their actions with reference to their fiduciary duties to protect long-term shareholder value. However, it can oftentimes be questioned whether poison pill actions are in fact undertaken in the best interest of the shareholders – or first and foremost undertaken in the best interest of the board of directors and the management, looking to protect their positions that would most likely be lost if a change of control took place.
2. Dispersed ownership
U.S. companies often have a more dispersed ownership structure than their European counterparts, meaning that they have many shareholders and more rarely one controlling (or a block of controlling) shareholders. This makes the shareholders more vulnerable to hostile takeovers – as well as being more ”in the hands of” the management and the board of directors.
Poison pills can protect against aggressive bidders building up a stake stealthily ("creeping acquisition") that is unwanted from a holistic value building perspective.
Four typical U.S. style poison pills
Four typical examples of a poison pill will be:
1) Diluting the unwanted shareholder
One mechanism will be to have a system in place where if an unwanted shareholder comes above a certain threshold of ownership, then this triggers a right for all other shareholders to purchase (subscribe for) new shares at a significant discount to market value. This has the consequence of diluting the ownership, both in value and in relation to control rights, of the unwanted shareholder. This can be such nasty poison pill that it completely deters the unwanted shareholder from purchasing or bidding on any more shares.
2) Golden parachutes
The incumbent executives can be granted “extra golden” golden parachutes in the form of both severance pay in cash, equity in the company, and other forms of compensation in cases where a change of control happens. This will also be a cost for the company that can be so significant that it deters the unwanted shareholder from wanting to acquire more shares, or at least it may serve to reduce any bid to the degree that the other shareholders would turn down the offer and instead let the current (then often dispersed ownership) remain and keep the shares.
3) Selling the “crown jewels”
The target company can also set up a structure where any change of control (and note that the threshold for what “change of control” means can be set much lower than 50 % - e.g. at 10 or 15 %) would trigger a sale of key assets. For instance, the central IP assets might be sold leaving the company in a position where it has effectively been placed in liquidation – it may have gotten a fair price for the assets which can be distributed to the shareholders, but the company will – in the longer or shorter term – need to cease operations and be wound down.
4) Detering mechanisms in the Articles of Association
Other poison pills can include triggers adopted in the company’s bylaws or articles of association and can entail a vast number of negative outcomes for the company meaning that the unwanted shareholder is not gaining control over the company it is aiming for but instead a much less attractive (with a lower market value). Any negative consequences that are triggered by a change of control would be a form of poison pill in this regard.
Why poison pills are so uncommon in Europe?
In Europe there is a much greater degree of shareholder involvement in matters such as new share issues, dilution and other forms of poison pill setups. Furthermore, in Europe there is in general more of a tradition of having a controlling or at least impactful owner instead of the dispersed ownership that is more typical in the U.S. This means that the board of directors and the current management cannot adopt poison pills to protect their own position and fend off unwanted change of control situations where they might lose their position unless they have the support of the shareholders.
Obligation of the board of directors
In Europe it is furthermore a general corporate principle that the board of directors must act in the best interest of the shareholders – and that they may not serve to, in an inequitable or otherwise unfair way, benefit one or more shareholders at the expense of another shareholder, and poison pills are as an outset deemed to (most likely) be in breach of this duty.
The EU’s Take Over Directive
In the EU wide so-called Take Over Directive, there are explicit rules that limit or even forbid the use of poison pills in bid situations involving publicly traded companies. A board of directors may not adopt a measure that can function as a poison pill without seeking shareholder approval. Hence they cannot, as is the case in the U.S., set up a poison pill to fend off a buyer that they fear will risk their jobs, or they in some other way deem the shareholder as being unwanted (in relation to the company, its board and management or its current shareholders). This is the case even if the board’s reluctance is based on the determination that the bid (or stake building) is lowballing in relation to the potential price that the shares could or should fetch. Any open bid for shares in a company is deemed as a healthy and important part of the public markets and any decision for or against a bid should be in the hands of the companies current shareholder – albeit that the board will be required to issue a recommendation as to whether they believe that the shareholders should accept or reject the offer.
Final words
Understanding what a poison pill is, and how and why it has such a different application in the U.S. and in Europe, will help you understand the global M&A market, evaluate investment opportunities, and also to assess and take action in relation to any hostile bid.
Note that this article should not be seen or used as legal advice and should only be read as general knowledge sharing.
If you have any questions or want legal assistance in a cross-boarder investment or M&A transaction, please don´t hesitate to reach out on kat@stgcommerciallaw.com
.
London, 10 July 2025
Author: Kat Strandberg
What is a poison pill?
Simply put, a poison pill is an action from, or setup by, a company that serves to make it less attractive for an investor/shareholder to gain control over. It is used to defend against so called hostile take overs and is typically driven by management not wanting to be replaced in a change of control situation.
Check out Poison Pill US vs EU.
Why poison pills are common in the U.S.
1. Corporate law permits it broadly
The U.S. has a long history of hostile M&A activities and this has served to make defensive tactics more routine and accepted. Investment banks, activists, and PE firms regularly use hostile bids as a strategy—boards need a defense playbook, and the same actors may also be on the supporting end of a poison pill strategy when it serves their purpose (most likely as a minority stakeholder, potentially intending to “stake build” in the long-term) the best.
Delaware corporate law, which governs many U.S. companies, allows boards a wide discretion to adopt poison pills (and many other corporate actions) without shareholder approval. The board of directors and the management team of a U.S. corporation has more autonomy compared to a board of directors and a management team in a European company, as will be outlined in the following sections.
Boards can act preemptively to fend off unwanted bids and justify their actions with reference to their fiduciary duties to protect long-term shareholder value. However, it can oftentimes be questioned whether poison pill actions are in fact undertaken in the best interest of the shareholders – or first and foremost undertaken in the best interest of the board of directors and the management, looking to protect their positions that would most likely be lost if a change of control took place.
2. Dispersed ownership
U.S. companies often have a more dispersed ownership structure than their European counterparts, meaning that they have many shareholders and more rarely one controlling (or a block of controlling) shareholders. This makes the shareholders more vulnerable to hostile takeovers – as well as being more ”in the hands of” the management and the board of directors.
Poison pills can protect against aggressive bidders building up a stake stealthily ("creeping acquisition") that is unwanted from a holistic value building perspective.
Four typical U.S. style poison pills
Four typical examples of a poison pill will be:
1) Diluting the unwanted shareholder
One mechanism will be to have a system in place where if an unwanted shareholder comes above a certain threshold of ownership, then this triggers a right for all other shareholders to purchase (subscribe for) new shares at a significant discount to market value. This has the consequence of diluting the ownership, both in value and in relation to control rights, of the unwanted shareholder. This can be such nasty poison pill that it completely deters the unwanted shareholder from purchasing or bidding on any more shares.
2) Golden parachutes
The incumbent executives can be granted “extra golden” golden parachutes in the form of both severance pay in cash, equity in the company, and other forms of compensation in cases where a change of control happens. This will also be a cost for the company that can be so significant that it deters the unwanted shareholder from wanting to acquire more shares, or at least it may serve to reduce any bid to the degree that the other shareholders would turn down the offer and instead let the current (then often dispersed ownership) remain and keep the shares.
3) Selling the “crown jewels”
The target company can also set up a structure where any change of control (and note that the threshold for what “change of control” means can be set much lower than 50 % - e.g. at 10 or 15 %) would trigger a sale of key assets. For instance, the central IP assets might be sold leaving the company in a position where it has effectively been placed in liquidation – it may have gotten a fair price for the assets which can be distributed to the shareholders, but the company will – in the longer or shorter term – need to cease operations and be wound down.
4) Detering mechanisms in the Articles of Association
Other poison pills can include triggers adopted in the company’s bylaws or articles of association and can entail a vast number of negative outcomes for the company meaning that the unwanted shareholder is not gaining control over the company it is aiming for but instead a much less attractive (with a lower market value). Any negative consequences that are triggered by a change of control would be a form of poison pill in this regard.
Why poison pills are so uncommon in Europe?
In Europe there is a much greater degree of shareholder involvement in matters such as new share issues, dilution and other forms of poison pill setups. Furthermore, in Europe there is in general more of a tradition of having a controlling or at least impactful owner instead of the dispersed ownership that is more typical in the U.S. This means that the board of directors and the current management cannot adopt poison pills to protect their own position and fend off unwanted change of control situations where they might lose their position unless they have the support of the shareholders.
Obligation of the board of directors
In Europe it is furthermore a general corporate principle that the board of directors must act in the best interest of the shareholders – and that they may not serve to, in an inequitable or otherwise unfair way, benefit one or more shareholders at the expense of another shareholder, and poison pills are as an outset deemed to (most likely) be in breach of this duty.
The EU’s Take Over Directive
In the EU wide so-called Take Over Directive, there are explicit rules that limit or even forbid the use of poison pills in bid situations involving publicly traded companies. A board of directors may not adopt a measure that can function as a poison pill without seeking shareholder approval. Hence they cannot, as is the case in the U.S., set up a poison pill to fend off a buyer that they fear will risk their jobs, or they in some other way deem the shareholder as being unwanted (in relation to the company, its board and management or its current shareholders). This is the case even if the board’s reluctance is based on the determination that the bid (or stake building) is lowballing in relation to the potential price that the shares could or should fetch. Any open bid for shares in a company is deemed as a healthy and important part of the public markets and any decision for or against a bid should be in the hands of the companies current shareholder – albeit that the board will be required to issue a recommendation as to whether they believe that the shareholders should accept or reject the offer.
Final words
Understanding what a poison pill is, and how and why it has such a different application in the U.S. and in Europe, will help you understand the global M&A market, evaluate investment opportunities, and also to assess and take action in relation to any hostile bid.
Note that this article should not be seen or used as legal advice and should only be read as general knowledge sharing.
If you have any questions or want legal assistance in a cross-boarder investment or M&A transaction, please don´t hesitate to reach out on kat@stgcommerciallaw.com
.
London, 10 July 2025
Author: Kat Strandberg