Lawyers
Poison Pill in a Company Bylaws
The term poison pills refers to a defense mechanism against a hostile takeover of a company. It is found in the company’s articles of association. In the business world, this is a necessity, due to the many attempts by outside investors to take over and replace management of companies. There are many types of poison pills, but their purpose is the same: to prevent a hostile takeover of a public company without its consent.
By Igal Mor, Adv. & Notary
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In recent years, the phenomenon of large companies acquiring and taking over smaller companies has grown significantly. Due to this situation, companies are required to develop defense tactics that will prevent hostile takeovers by outside investors, since this is the greatest fear of any company. This is a situation in which the investor buys the majority of the company’s shares without her consent or coordination, and therefore he is able to take control of the company. To solve this problem, poison pill mechanisms are established in the articles of association of the company, which have different forms but have the same purpose: preventing an unauthorized takeover of the company.
There are many types of poison pill mechanisms in company bylaws (poison pills in company bylaws)
One form of poison pill is staggered appointment of board members, according to which a different group of several board members is appointed every few years. As a result of this mechanism, the external investor cannot immediately replace the board of directors upon purchasing the shares, and this limitation naturally neutralizes a very essential part of his takeover objective and is often a deterrent for prospective investors as well.
Bylaws of the company contain a poison pill: If event X occurs, Y will result
Another type of poison pill mechanism is the allocation of preferred shares to the existing controlling owners. As part of it, when an investor tries to purchase shares above the set threshold, which will give him a majority in the company, preferred shares will be issued to the controlling owners of the company at a reduced price, with the decision of the board of directors. Thus, the amount of shares that the hostile investor can purchase is very small, while the share of the other shareholders in the company increases. It should be noted that a poison pill in this structure prevents several investors from joining forces to take over the company since this mechanism sees them as one entity and not as separate investors.
Although poison pills are common throughout the world, their use is relatively uncommon in Israel. There is a reason for this, since most Israeli public companies already have centralized controlling owners who own more than half of the shares. Since there is no likelihood of a hostile takeover from outside, there is no need to establish a poison pill mechanism. What about limiting the power of the centralized controlling owner in order to ensure that he does not act contrary to the interests of other investors? In Israel, the company law contains a number of provisions which protect the general public and prevent centralized controlling owners from taking actions that may harm the general public.
In summary, “poison pills” in the company’s bylaws can often help you protect your capital in addition to providing the legal protection you require. Writing a company’s bylaws while incorporating such security mechanisms requires great skill and sophistication.
We invite you to consult with us regarding the options available to you to protect your business
Adv. Mor & Co.’s commercial law department has experience in representing various entrepreneurs, businesses, and corporations from Israel and abroad in a wide variety of legal areas.
