Worried over the likelihood of French companies becoming take over targets by foreign investor's in the wake of Mittal Steel's bid for rival Arcelor, the French government today confirmed its intentions to amend its laws to allow "poison pill defences" to resist hostile take-overs, by allowing companies to issue warrants to share holders.

The French finance ministry said that the government would amendment a new take-over law, to allow companies to issue warrants or options to buy new shares to ward off hostile bidders. However, the proposed new law, currently being debated in the French senate, would not affect Mittal Steel's bid to acquire Arcelor since it is based in Luxembourg and governed by the laws of Luxembourg

What is a poison pill?
A poison pill, also known as a 'shareholders rights plan', is designed to make it expensive for an acquirer to make a hostile bid for a company through an issue of convertible preferred stock distributed as a dividend to existing shareholders.

The preferred stock is convertible into common shares equal to or greater than the number of outstanding shares. The rights offer is automatically triggered when any hostile investor acquires or offers to acquire 10 per cent or more of a target company's shares or when an existing shareholder raises his stake by 5 per cent.

Once triggered, the company's shareholders (barring the acquirer) can exercise rights or warrants to buy additional equity in their company at a discount.

This makes it that much more expensive for a raider to acquire management control. The attempted take-over becomes its own poison because it vastly increases the number of shares that will have to be acquired to get management control and thereby raises the cost of a hostile acquisition.