Was Rachel Zane talking about a poison pill?

Asked question on Money SE about conversation in Suits S04E04:

You do that, it triggers a stock split.

His shares double in voting power.

Yours don't.

My question:

I never really got that. Ostensibly, if you own 20% of the stock just before the split, you own 20% of the stock just after the split. What am I missing?

User RPL says here:

it sounds like they are describing something akin to a "poison pill". In these arrangements, the "pill" is triggered by some predefined condition, say a party acquiring shares in excess of a defined threshold. What typically happens is that shareholders other than the ones who triggered the pill get a chance to buy shares at a substantial discount, thereby diluting the shares of the party that triggered it. Because the other shareholders have to buy their additional shares, albeit at a discount, and because it applies only to certain shares, it's not really a split, but it's close enough that the writers of the show may have felt it was worth using the term that is more familiar to the public.

Guess: So was Rachel Zane talking about a poison pill? If so what were the details in the series that support such? If not what was going on then?

Best Answer

Yes, the target of the acquisition had a poison pill in place to discourage a takeover.

A buyout is an attempt to acquire a controlling share (>50%) of a company. If the other stockholders do not want the party to get the controlling share than a buyout is basically a hostile takeover. This is what Rachel's boss is proposing as a means of acquiring the company in question.

A poison pill is a way to defend against a hostile takeover. Typically it involves allowing all of the shareholders except for the acquiring party to buy discounted stock, inflating their profit in the event of a takeover, but making the takeover much more expensive. Another type of poison pill allows the stockholders in the target company to buy discounted stock in the acquiring company, threatening the value of the company taking over the target company. It is an attempt to make a takeover unpalatable.

So look at the dialogue with some more context...

*What about a buyout?

*Never gonna happen. He's got a golden parachute.

*Well, then I've got two people on the board. I can force a vote.

*You do that, it triggers a stock split. His shares double in voting power. Yours don't.

Rachel's boss is proposing a buyout, but Rachel says it isn't an option because the attempt will allow Gillis (the "he" they're talking about) to double his shares and out-vote them on the board. As the acquiring party, they wouldn't be able to also double their shares to match his newly acquired votes. This is a "flip-in" poison pill, in which everyone but the acquiring party is able to double their shares at a low cost.

There is mention of Gillis having a golden parachute, which is a pre-set protection in the case of him losing control of the company. Some golden parachutes are designed to be so egregious (like massive payouts) to the party buying out the person with the golden parachute that they themselves become a kind of poison pill (i.e., a measure to prevent takeover). From context, it sounds like Rachel is referring to the flip-in poison pill itself as a golden parachute, which it kind of is because it would allow Gillis to make a huge profit in the buyout.