What is the purpose of a poison pill in mergers and acquisitions, and what fiduciary duties are implicated?

• A. The poison pill deters hostile takeover; fiduciaries must balance anti-takeover protections with maximizing shareholder value.
• B. The poison pill guarantees the deal goes through with a premium.
• C. The poison pill is illegal in all cases.
• D. The poison pill eliminates all risk in a takeover.

Answer: (A)

A poison pill is a defensive tool that makes a hostile takeover more difficult or expensive unless the board approves it, buying time to evaluate the offer and seek a better deal that truly benefits shareholders. The fiduciary duties at play are the directors’ duties of loyalty and care to act in the best interests of shareholders and to maximize value. Using a poison pill is permissible when it is reasonably tailored to address a credible threat and when the board follows a fair process, including getting independent advice and considering alternatives. This approach aims to preserve value for shareholders rather than entrench managers, so courts look for evidence that the defense is designed to maximize value and was entered into in good faith.