poison pill

Case Study Following a major drop in the price of its common stock, online brokerage firm E*Trade in July 2001 adopted a flip-in poison pill that would help thwart hostile takeover bids for the company. Under what was called a “shareholder rights plan" by the firm, stockholders were issued rights to purchase from E*Trade 0.001 shares of a new series of participating preferred stock at an initial purchase price of $50. The rights plan would be triggered if an individual or group acquired beneficial ownership of 10% or more of the firm's common stock. Issuance of the new preferred stock would make a hostile bid considerably more expensive and, as a result, less likely. Critics of shareholder rights plans claim poison pills help protect ineffective managements while penalizing shareholders who are unable to benefit from higher share values that often result from takeover attempts.