CS Executive · Capital Market and Securities Laws · Acquisition of Shares and Takeovers - Concepts
Which of the following best describes a 'poison pill' as a takeover defence strategy used by a target company's board?
A poison pill is a defence that makes a hostile acquisition costly or dilutive, for example by letting existing shareholders buy shares at a discount once an acquirer crosses a threshold holding. It is a defence mechanism, unlike a white knight or scorched earth policy.
- AA device that makes the target's shares sharply more expensive or dilutive for an acquirer, such as allowing existing shareholders to buy shares at a discount once a threshold is crossedCorrect
- BA plan by the acquirer to buy shares gradually through the open market without any public announcement
- CA merger of the target with a friendly company that is invited to make a competing offer
- DA sale of the target's most valuable assets so that the acquirer loses interest in the company
Explanation
A poison pill is a pre-emptive defence that triggers dilution or extra cost when an acquirer crosses a stated holding. The competing-friendly-bidder option describes a white knight, and the asset-sale option describes a scorched earth policy. Gradual open-market buying is an acquirer's tactic (creeping acquisition), not a defence.
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