Definition - What does Flip-in Pill mean?
A flip-in pill is a defense strategy in which existing shareholders of a company are allowed to purchase more shares at a discount. This strategy is used by the target company to prevent a hostile takeover by diluting the value of the company with the increased available shares. As a result, the percentage of ownership of the potential acquiring company is reduced.
Divestopedia explains Flip-in Pill
A flip-in pill is one of the five types of poison pills available as defense strategies for companies. This strategy is called a poison pill because it can also have undesirable effects on the target company. When a company dilutes its shares, the value per share of the company goes down, thereby making it unattractive to potential buyers. However, this is true only when the board acts in the best interest of its shareholders: a theory refuted by many experts. These experts argue that when the board adopts a flip-in strategy, it reduces the number of potential offers in order to protect their own positions because when another company takes over, the position of the board is in jeopardy. Therefore, to secure their positions, many boards prevent acquisitions by taking this poison pill. Ultimately, though, this strategy is detrimental to the company and its shareholders.
The flip-in strategy is a provision laid down in a company's bylaws. It is triggered into effect when any particular shareholder acquires more than a certain number of shares, typically 20 to 50 percent, depending on the bylaws. From a shareholder's perspective, flip-in helps to make quick money because they purchase the new shares at a discount. The difference between the market price of the share and its discounted purchase price is profit for the shareholders.