A target company has various kinds of recourses available to ward off hostile takeover bids of the predator. Out of these defensive actions against company takeovers and mergers, those that work both ways to harm not only the bidder but also damage the interests of the target or its members, are called "poison pills”.
Under the shareholder rights plans, the target company confers stock options in the form of rights to its existing shareholders (except the bidder) to buy more of its new voting stocks for a cheap price at hefty discount , in the event anyone acquires larger than a threshold limit of target's stock (usually 20-30%). This dilutes the percentage of stockholding of the bidder in the target company. Moreover, it also raises the stock swap or exchange ratio against the bidder. Thus this renders it more difficult for such intending buyer to wrest control of the target.
The bylaws of the target may purposely provide that, where the acquirer's holdings of the company touches a cut off point (typically one third), the shareholders of the target can sell off their stock holdings to the company itself or to the acquirer at a hefty premium. This can turn the take over into a prohibitively expensive proposition for the bidder.
The target can purposely incur large debts in order to make its acquisition an unattractive proposition.
The target company may issue a large number of bonds on promise to repay the same at a substantial premium, if the company is taken over.
An extreme version of the poison pill is the "suicide pill" whereby the target company may take steps for its self destruction.
In November 1985 for the first time recourse to poison pills received judicial approval when the Delaware Supreme Court upheld it as a valid instrument under the Delaware corporate law in the decision of Moran v. Household International, Inc.
