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"Poison Pill" Contract

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Definition: NBA general managers have begun to use "poison pill" contracts as a way to exploit the strict new salary cap and luxury tax rules in the league's new collective bargaining agreement.

Here's how it works:

 

  • Team X wants to sign a restricted free agent away from Team Y. Team Y has the right to match any contract offer.
  • Team X structures the contract offer to maximize the potential luxury tax penalties for Team Y if they choose to match, usually by back-loading the deal. The total value of the contract might be $40 million, but the pay schedule might be $5 million in each of the first two years and $15 million in the second two - designed to put the original team over the luxury tax threshold in years three and four.
The 2011 Collective Bargaining Agreement gives a major advantage to teams writing these poison pill contracts. For salary cap and luxury tax purposes, only the average yearly value of the deal is counted. But a team matching the offer does not get the same benefit.

For example: the Houston Rockets offered identical contracts to Knicks guard Jeremy Lin and Chicago Bulls forward/center Omer Asik. They deals will pay roughly $5 million in years one and two and $15 million in year three. For the Rockets, those deals will count as roughly $8.3 million contracts each year, for cap and tax purposes. If the Knicks opted to match, Lin's deal would count at its actual value. That $15 million cap hit - combined with the contracts of Amar'e Stoudemire, Carmelo Anthony and Tyson Chandler - would have come with a staggering luxury tax bill.

 

"Poison Pill" Signings

Under the previous collective bargaining agreement, it was rare for a restricted free agent to attract very lucrative offers from new teams, and most offers were simply matched. But in the opening week of free agency 2012, several notable restricted free agents signed specially-structured "poison pill" deals and are headed to new teams.

Omer Asik of the Chicago Bulls was the first, signing a heavily back-loaded deal to become a member of the Houston Rockets. They used a similar ploy to pry Jeremy Lin away from the Knicks.

The Toronto Raptors took this one step further, signing Knick guard Landry Fields to a back-loaded contract, mostly as a way to prevent the Knicks from using Fields in a sign-and-trade deal to acquire Steve Nash.

Why "Poison Pill?"

The term poison pill is derived from the world of high finance and generally refers to any tactic used in an attempt to prevent a hostile takeover.

 

Examples: The Houston Rockets offered restricted free agent center Omer Asik a three-year, $25 million "poison pill" contract, with $15 million of the total payout coming in the third year. That pay schedule will make it very difficult for the Bulls to match, as Chicago already has nearly $35 million committed to Derrick Rose and Carlos Boozer in 2014-15.

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