Poison pill amendment

Poison pill is a term used to describe a tactic that a company can use to protect itself from another company trying to take it over. Imagine you have a favorite toy, and someone is trying to take it away from you. You can use a special trick, like making your toy taste really bad, so that nobody wants to take it away from you. That's kind of what a poison pill does for a company.

So, a poison pill amendment is a special rule that a company can add to its own rules to protect itself from being taken over. It works like this: If another company tries to take over the first company, the poison pill amendment kicks in and makes the takeover more difficult, kind of like making the toy taste bad. It's like a defense mechanism for the company.

Here's how it works: The company adds the poison pill amendment to the rules that it follows. The poison pill amendment might say that if another company buys a certain amount of the first company's shares, then something bad happens. For example, let's say the poison pill amendment says that if another company buys 20% or more of the shares, then the first company will create new shares and give them to its existing shareholders. But the shares that the other company bought will lose their value, so the other company won't get any benefit from the purchase.

This might sound a little confusing, so let's use an example with toys. Imagine you have some pieces of a puzzle, and you are putting them together. But another person wants to take your puzzle and complete it for themselves. So, you use a poison pill amendment. If they try to take more than half of the puzzle pieces, you quickly add some extra pieces to the puzzle that only you know about. This will make it harder for them to solve the puzzle because they won't know where the new pieces go, and it might not work out as they expected.

In the business world, the idea behind a poison pill amendment is to make it difficult for another company to take over a company without the approval of the company's current owners and management. By using this tactic, the company hopes to keep itself safe from being taken over by a company that might not have its best interests at heart.

It's important to note that poison pill amendments can be controversial. Some people argue that they prevent companies from being taken over, even if it could be good for the company and its shareholders in the long run. But others argue that they are necessary to protect the company from hostile takeovers and to give the company's owners and management more control over its future.

So, just like you use a special trick to protect your favorite toy from being taken away, companies can use poison pill amendments to protect themselves from being taken over by another company.