BID FOR A GIANT AUTO MAKER : Glossary: Poison Pills and Greenmail

Poison pills and greenmail became standard business lexicon amid the 1980s boom in hostile takeovers, but they had faded from the 1990s scene until Wednesday’s surprise offer by Kirk Kerkorian to acquire Chrysler Corp.

Poison Pill

A mechanism for a company to defend itself against a hostile takeover by making the cost of the takeover prohibitively expensive. When a hostile bidder buys more than a certain percentage of a company’s stock, the poison pill is activated that allows existing shareholders to buy additional stock at a low price--in effect driving up the cost of the unwelcome takeover. Shareholders sometimes oppose a poison pill because it may prevent them from receiving the highest possible price for their stock.

Chrysler has a poison pill that allows shareholders to buy shares at half-price when a single party acquires more than 15% of the auto maker’s stock. Kerkorian owns 10% of Chrysler’s shares; he earlier persuaded the company’s board to raise the poison pill threshold from 10% to 15%.

Poison pills are legal as long as they are used to ward off all potential investors. They cannot be triggered to scare away an unwelcome suitor if the target company’s board has put the company up for sale. Last year, a Delaware court ruled that Paramount Communications could not use its poison pill to ward off suitor QVC, because the company had already agreed to be sold to Viacom, a move that put Paramount “in play.” But Chrysler’s poison pill could be used against Kerkorian because management has insisted the auto maker is not for sale.

Greenmail

A hostile suitor uses greenmail when it buys up a large portion of a company’s stock and induces the target to buy back the shares at a higher-than-market price in exchange for a promise to abandon the takeover attempt. It is considered an unethical maneuver because it enriches a major shareholder at the expense of others.

Although greenmail is not explicitly against the law, legal experts say it wouldn’t be defensible in court because it involves offering a preferential price to a single shareholder. It has been used only occasionally in the past and not recently, because any board that agreed to it would surely draw a lawsuit from institutional investors. A more likely scenario for Kerkorian is that he would sell his 10% stake to another outside party at a premium over the market price. That is legal because it does not directly involve Chrysler or its other shareholders.