I don’t mean to beat up on the other posters, but I happen to know a little corporate law, and you might want to listen to me.
A poison pill, also known euphamistically as a “shareholder rights plan,” is one particular kind of anti-takeover device (there are many kinds). Adopted by management of companies who fear hostile takeover, poison pills work as follows:
When an hostile acquirer acquires a certain percentage of the target company’s shares, the poison pill is activated, (assuming that management does not de-activate the pill --this feature allows for friendly takeovers). After activation, the shares owned by all shareholders except for the hostile acquirer are multiplied, perhaps doubled. This dilutes the shares held by the acquirer.
So if Hostile Co., Inc. acquires 15% of Yahoo’s shares, and the pill goes into effect, suddenly Hostile Co. has only 7 1/2 % of the shares. The obvious effect is that Hostile Co. will now have to spend more money to reach 50% of the shares, thus discouraging takeover attempts.
But poison pills are more insidious than this. You see, they encourage shareholders of the target company to “hold out” and not tender their shares to the acquirer, since the remaining shareholders get their shares multiplied. As a result, shareholders will be disinclined to tender their shares in response to a hostile bid for a company.
Poison pills have been challenged in court on the theory that they don’t treat shareholders equally. When I studied corporate law, these challenges hadn’t fared too well, as I recall. In any event, many (most?) takeover battles end up in court, and judges decide what is fair and what isn’t.
Hope that helps!