In the dynamic business world, successful public and private companies often find themselves targeted by investors or competing companies seeking to execute a hostile takeover. When a takeover is suddenly placed on the table without the coordination or consent of the board of directors, in the absence of prior preparation, the company's management is required to respond quickly to protect the interests of the company and all its shareholders, but sometimes it is possible to prepare in advance without harming proper corporate governance.
Corporations, especially public corporations, sometimes tend to adopt rapid takeover prevention mechanisms (such as a Staggered-Board) and "Poison Pill" clauses that will prevent a hostile takeover of the company, ranging from gentle mechanisms to aggressive ones. Despite the name that brings up associations of the evil queen from the Snow White story, it is actually a sophisticated legal tool, which, when properly drafted and implemented, can grant the company valuable time to examine acquisition offers, serve as a significant bargaining chip and pressure mechanism that will improve the company's position during negotiations with the acquirers and sometimes even prevent takeover attempts in the first place.
The concept of a "Poison Pill" is designed to make the company an expensive and unprofitable acquisition target for the hostile buyer, just as a poison pill harms whoever swallows it. The mechanisms can be such that they make the takeover and replacement of management uneconomical (for example, "Golden Parachutes" or "Macaroni Defense") and can be clauses that harm the rights of shareholders attempting to take over without the "blessing" of the board of directors (which in a public company does not require approval for the transfer of shares, and even in a private company, the board's discretion to object to the sale of shares will generally be limited even if the articles of association seemingly grant full discretion). While such mechanisms may be legitimate, they cannot violate fundamental shareholder rights or favor the interests of management over the interests of the company.
Israeli law (both the Companies Law and the Securities Law) prohibits discrimination between shareholders in the same class of shares or the creation of shares with preferential voting rights, thereby, historically, making it difficult and even impossible to use many types of poison pills. The Israeli Companies Law imposes increased duties of care and fiduciary duties on directors, and also stipulates that a party seeking to cross a certain threshold of holdings of voting rights in a public company cannot secretly collect shares on the stock exchange ("Creeping Takeover) but must appeal publicly, equally, and in an orderly manner to all shareholders ("Tender Offer"). This mechanism established by law acts, in fact, as the company's built-in defense: it slows down the takeover process, makes it transparent, and gives the board valuable time to examine the offer, express its opinion on it, or find alternative buyers.
In a judgment handed down in July, 2026, by the Israeli Supreme Court, the Court rejected an appeal against the decision of the Central District Court, which issued an injunction preventing an Israeli company traded on NASDAQ (until May 2020 it was also traded on TASE - the Tel Aviv Stock Exchange) from adding a poison pill mechanism to its articles of association stipulating that in certain cases, where a shareholder or shareholders together hold 9.99% or more of the company's shares, a dilution mechanism will be activated, allowing all other shareholders to purchase the company's shares at a price of $0.01. The Court found that both Israeli and American law apply to the company and adopted the American caselaw stating that when examining a poison pill defense plan, one must examine whether the clause is proportionate to the threat from which the poison pill protects, and that the threat from which the poison pill protects must be concrete and not theoretical. In this case, the mechanism adopted could have prevented the convening of a shareholders' meeting, and the Court therefore issued an injunction preventing it, as it ruled that the shareholders' right to convene a general meeting is an unconditionable right.
This caselaw emphasizes the importance of careful drafting of defense mechanisms by lawyers with expertise in the field (and when it comes to an Israeli company traded outside of Israel, by someone familiar with the laws in Israel and the country in which the company is traded), rather than copying texts from other companies. Improper drafting or activating the mechanism in a way that is inconsistent with the provisions of the law could lead to complex litigation and even limit the company's ability to rely on the defense mechanism it sought to create.