Explain how a poison pill (shareholder rights plan) actually works mechanically: what triggers it and what happens to the acquiring shareholder's stake.

What interviewers are really testing

This topic tests whether a candidate understands M&A as a NEGOTIATION governed by law and incentives, not just a spreadsheet exercise: a favorite way for elite-boutique interviewers (especially at RX/restructuring-adjacent and pure advisory shops like Lazard, PJT, Evercore, where hostile and contested situations are bread and butter) to probe judgment rather than just mechanics.

The sequencing knowledge: can you describe, in order, how a hostile approach escalates (private approach, bear hug, tender offer and/or proxy fight) and explain WHY a bidder would choose a tender offer versus a proxy fight (a tender offer goes directly for control of shares/economic ownership; a proxy fight goes for control of the BOARD, useful when a poison pill or staggered board makes a share-based tender offer alone insufficient to gain control quickly).

The defense taxonomy, correctly split into pre-planned vs. reactive: interviewers want to hear 'poison pill' named as the dominant modern defense, correctly explained (dilution mechanism via a shareholder rights trigger, not a vague 'makes it expensive'), and want structural defenses (staggered board, supermajority provisions) distinguished from reactive ones (white knight, litigation) deployed only once a threat is live.

The fiduciary-duty backbone: a strong candidate references Unocal (proportionality) and Revlon (duty to maximize value once a sale is effectively decided) by name or substance, showing they understand a board's defenses are legally constrained, not unlimited.

Breakup fee mechanics and magnitude: candidates should know the standard range (roughly 2-4% of deal value for target-paid fees), the purpose (compensating the original bidder for due diligence/opportunity costs, deterring but not blocking superior offers), and the existence and typically larger size of REVERSE breakup fees (acquirer-paid, for financing/regulatory failure).

Signal mastery by connecting hostile-deal defenses and friendly-deal protection devices as the SAME underlying question (what stops the other side from walking, and at what cost) rather than treating them as unrelated topics.

Common traps

Trap 1: Confusing a tender offer with a merger vote. A tender offer is a direct offer to shareholders to buy their shares (bypassing the board), typically followed by a squeeze-out merger once a control threshold is reached; it is NOT the same mechanism as a shareholder vote on a negotiated merger agreement.

Say it out loud: "A tender offer goes directly to shareholders to buy their shares, bypassing the board entirely: it's different from a merger vote, which requires the board to have already signed an agreement that shareholders then approve."

Trap 2: Describing a poison pill as simply 'making the company expensive to buy.' The actual mechanism is dilution: once a bidder crosses a trigger ownership threshold, all OTHER shareholders get the right to buy new shares at a steep discount, diluting the bidder's stake: the pill doesn't raise the price directly, it makes crossing the trigger economically self-defeating for the bidder.

Say it out loud: "A poison pill works through dilution: once someone crosses the trigger ownership percentage, every OTHER shareholder can buy new shares at a discount, diluting the bidder's stake, which makes crossing that threshold without board approval irrational rather than simply making shares pricier."

Trap 3: Treating 'just say no' as an unlimited board power. A board's ability to reject a bid and deploy defenses is constrained by fiduciary duty: Unocal requires defenses to be proportionate to a legitimate threat, and Revlon requires the board to maximize value once a sale becomes effectively inevitable.

Say it out loud: "The board can say no, but only within fiduciary limits: under Unocal the defense has to be a reasonable, proportionate response to an actual threat, and once the company is effectively being sold, Revlon duties kick in and the board has to focus on maximizing the price shareholders receive."

Trap 4: Assuming a no-shop clause fully prevents the board from accepting a better offer. A no-shop restricts active SOLICITATION of alternatives, but nearly every merger agreement preserves a fiduciary out allowing the board to consider (and potentially accept, paying the breakup fee) an unsolicited superior proposal; a board cannot contractually sign away its fiduciary duties.

Say it out loud: "A no-shop stops the target from going out and shopping itself around, but it can't stop the board from considering an unsolicited superior offer that shows up on its own: the fiduciary out preserves that, subject to matching rights for the original bidder and payment of the breakup fee."

Trap 5: Assuming breakup fees and reverse breakup fees are the same size and paid by the same party. They are mirror images paid by DIFFERENT parties for DIFFERENT reasons: standard (target-paid) breakup fees run roughly 2-4% of deal value for accepting a superior proposal; reverse (acquirer-paid) breakup fees, for financing or regulatory failure, are typically LARGER given the acquirer's greater size and the higher cost/uncertainty a failed deal imposes on the target.

Say it out loud: "Those are mirror-image but distinct fees: the target pays a breakup fee, usually 2 to 4% of deal value, if it walks for a superior proposal; the acquirer pays a reverse breakup fee, often meaningfully larger, if IT fails to close, typically due to financing or antitrust failure."