Poison Pill: A Tool for Spies That Also Describes a Corporate Strategy

From a Wall Street Journal column by Ben Zimmer headlined “‘Poison Pill’: A Tool for Spies Turned Corporate Strategy”:

When Tesla CEO Elon Musk made a $43 billion unsolicited bid to take over Twitter last week, the social-media giant responded by adopting a “poison pill” plan to ward off a takeover. The plan would prevent Mr. Musk from increasing his stake in Twitter beyond a limit of 15%. If he reached that threshold, all other shareholders would be allowed to purchase additional shares at a deep discount, diluting his stake in the company. Mr. Musk, for his part, said on Thursday he has lined up funding and is exploring making a tender offer, taking his bid directly to Twitter’s shareholders.

The “poison pill” as a defense against unwelcome takeover bids entered the lexicon of corporate finance nearly four decades ago. But the metaphor originates in the world of espionage, with the image of spies swallowing cyanide capsules in case they are captured behind enemy lines.

Intentionally overdosing on poison in pill form has long been deployed in wartime as a method of committing suicide rather than facing capture. Napoleon Bonaparte, after nearly being captured by Russian forces in his retreat from Moscow in 1812, carried a pill of poison with him, which he swallowed when he was exiled to the island of Elba two years later. Napoleon survived, however, since the poison had lost its efficacy.

The poison pill has been a common cinematic trope as well, used as early as 1928 in Fritz Lang’s silent film “Spies,” in which a henchman in a spy ring bites down on a pill when he is confronted by Secret Service agents. Real-life cyanide capsules were used to commit suicide by Nazi leaders such as Heinrich Himmler and Hermann Goering at the end of World War II.

The term “poison pill” made the leap to business thanks to a June 16, 1983 Wall Street Journal article about a hostile takeover bid of Lenox, the ceramics manufacturer, by Brown-Forman Distillers, producers of Jack Daniel’s whiskey. Lenox announced a defense against the takeover that involved offering a special dividend to Lenox shareholders, providing them the right to purchase half-price shares in Brown-Forman in case the takeover was successful.

“Lenox’s strategy already is being referred to on Wall Street as ‘the poison-pill defense,’” the Journal article read, crediting Lenox’s lead investment banker, Martin Siegel of Kidder, Peabody & Co. Revisiting the episode in 1989, the Journal wrote that the plan itself was conceived by Martin Lipton, a renowned takeover attorney and co-founder of the New York City firm Wachtell Lipton Rosen & Katz, who had put a similar scheme in motion in 1982, defending El Paso Co. from a takeover by Burlington Northern Railroad. Mr. Siegel was credited with coining the term “poison pill.”

Lenox’s defense was successful, as Brown-Forman was forced to increase its takeover offer and enter into a negotiated agreement before acquiring the company. In 1985, the Delaware Supreme Court ruled that such defenses are legitimate and uphold shareholders’ rights.

Indeed, companies have often preferred the more staid nomenclature of “shareholder-rights plan” to “poison pill.” In a 1987 interview with the Journal, Mr. Lipton conceded that “poison pill” was “a disaster of a name.” Still, he acknowledged that other terms “don’t have the same catchy sound as ‘poison pill.’”

That catchy appeal helps explain why the “poison pill” label has been extended to fields beyond finance. As a 2005 Legal Affairs article observes, “Washington policy makers use ‘poison pill’ to refer to controversial legislative provisions that are added to a bill in an effort to kill it,” and “computer programmers have developed ‘poison pill’ applications that are designed to frustrate spammers.” Given how far the phrase “poison pill” has spread, it appears to be unkillable.

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