Suicide Pill: Meaning, Methods, Limitations

What Is a Suicide Pill?

A suicide pill is an aggressive defensive strategy utilized by a target company to prevent attempts at a hostile takeover. The prey, as a last resort, engages in self-destructive measures to put off its suitor, favoring potential bankruptcy over the prospect of a merger occurring.

A suicide pill can also be referred to as the "Jonestown Defense," in reference to the cult that committed mass suicide by poisoning in Guyana in 1978.

Understanding a Suicide Pill

The suicide pill defense tactic is considered an extreme version of the poison pill: an anti-takeover strategy that consists of allowing existing shareholders the right to purchase additional shares at a discount to dilute the ownership interest of any new, hostile party.

Suicide pills differ from situation to situation, and may result in the breakup or dissolution of the company. Such a defense is most often implemented in circumstances when a competitor attempts a hostile takeover, and the target's management or current ownership, viewing the takeover as a foregone conclusion, would prefer the company cease to exist than see it fall into outside hands. In these rare cases, the company's directors believe their best defense to a hostile takeover is to cease operations or be placed under the protection of a bankruptcy court.

Suicide pill measures are most commonly adopted by smaller companies. The decision isn’t taken lightly and will only be pursued should the board of directors believe that a takeover by a competitor would mean the end of the business or result in irreparable harm to an ongoing business plan. 

A company could engage in these self-destructing tactics if it fears its enterprise will simply be closed after the acquirer cherry-picks its best assets and people. Rather than allow that to happen, it may decide to adopt measures that make the takeover impossible. 

Suicide Pill Methods

There are a handful of damaging strategies that management can pursue to put outside predators off buying its business. Common examples include:

• Taking on Excessive Debt: Borrowing lots of money at extortionate rates is one way to deter buyers. Should the takeover eventually go through, the acquirer will suddenly find itself inheriting mountains of debts and outstanding payments, crippling its finances and making it difficult to allocate capital to improving the business, bringing it in sync with whatever else it owns and capturing synergies.
• Special Dividends: Another way to make the balance sheet less attractive is to execute a one-off, big income payment to existing shareholders. A special dividend could be declared that depletes working capital to an extent that operations can no longer be funded.
• Dumping Key Assets: The target company is a target because someone else sees value in what it owns. That may no longer be the case if its most attractive assets are sold off at a discount to any other party except the potential acquirer.

Criticism of a Suicide Pill

Committing suicide is a high price to pay for freedom and one that is unlikely to sit well with those who had little or no say in the matter. Shareholders of the targeted company that don't have much in the way of voting rights will be disgruntled that the value of their shares have been destroyed while the directors of the company are unjustly enriched. 

In the event of a takeover, cash or shares in the new company should be coming their way. Bankruptcy, on the other hand, will likely leave the many minority shareholders without a powerful voice empty-handed.

Limitations of a Suicide Pill

If shareholders unite, they may be able to prevent a company’s board from adopting suicide pill measures. There’s also the possibility that the hostile company seeks an injunction against the company's defensive actions and finds a way to stop the board from foiling the takeover bid.

Courts and judges might look unfavorably at a company’s attempts to ruin itself to prevent being taken over and step in to block it from happening, mindful that such action could leave many people out of work and innocent, voiceless shareholders out of pocket.