No. 52: Effectiveness of Poison Pills in European and International Law


  • Dora Klančnik
Publish Date:
July 15, 2021
Publication Title:
European Union [EU] Law Working Papers
Stanford Law School
Working Paper
  • Dora Klančnik, Effectiveness of Poison Pills in European and International Law, EU Law Working Papers No. 52, Stanford-Vienna Transatlantic Technology Law Forum (2021).
Related Organization(s):


For decades now, takeovers have been a prevailing method for gaining corporate control on the active market. Growing competition led to development of a significant number of takeover strategies. That corporate control can be achieved through mutual negotiations, or in a hostile manner due to the resistance of the target companies. As a result of innovative and complex takeover strategies, target companies established a wide range of defences in order to protect themselves against the rivals and forestall the unwelcomed takeovers. While anti–takeover defences are either preventive or remedial, one of the most often used and effective ones are shareholder rights plans, commonly known as poison pills.

Although there is no precise definition of the term, poison pills can be perceived as a group of different defence mechanisms that operate similarly. Objective behind a typical poison pill is to dissuade the takeover attempt or at very least, force the bidder to pay a substantial premium to the target company’s shareholders. Since they can either avert the takeover or raise the target company’s and shareholder’s value by persuading the bidder to increase its price, they are viewed as an effective takeover defence. However, there are two conflicting theories pertaining to the effectiveness of poison pills, each stating the polar opposite – that poison pills can either benefit or on the other hand only harm the target company and consequently the value of existing shareholders.

Poison pills are generally implemented by the target company’s executives, meaning that their adoption is in hands of the managers or the board of directors. For that exact reason, the dilemma arises whether any specific issues can be encountered in that regard. This stems from the proposition that poison pills serve as a mechanism which puts incompetent managing boards in inherent position. Management entrenchment issue becomes all the more apparent when the managers, that adopted the poison pill, do not act in the interest of the target company’s shareholders. Their implementation is neither risk free nor it is guaranteed that it will always carry beneficial effects irrespective of the effectiveness with which they block certain undesirable offers. Different jurisdictions approach the takeover laws and takeover defence regulations differently. Therefore, their efficiency will be evaluated within the jurisdictions that accepted them in their legal systems. The main focus of this master thesis shall be concentrated on the adoption and effectiveness of poison pills, and questions arising out of their usage.