Although the ruling in Carmody v. Toll Brothers, Inc . The language of the decision stands in marked contrast to a 1997 decision by a Georgia federal court, which we analyzed in a previous article for this publication, upholding the dead hand features of a poison pill adopted by a Georgia company. A typical poison pill provides for the distribution of rights to the issuer's shareholders. Initially, the rights may not be exercised. The resulting dilution to the holdings of the hostile bidder is intended to create a prohibitive increase in the bidder's acquisition costs.
Poison pills are also popular because they are flexible.
The ability to redeem the rights preserves the board's ability to accept an offer it deems acceptable. At the same time, a rights plan cannot serve as an absolute bar to a takeover. Directors are not relieved of their fiduciary duties in evaluating and responding to a takeover bid and can expect that the hostile bidder will institute litigation seeking to compel them to redeem the rights. In some cases, the hostile bidder may be able to implement a strategy that will enable it to control the redemption decision. The purpose of this strategy is to remove and replace the target's board, and redeem the rights, prior to purchasing shares in the tender offer.