Twitter’s decision to launch a defense of the poison pill has given its embattled board a chance to thwart Elon Musk’s bid to buy what he has dubbed the world’s “de facto public square.”
While the mechanism may not entirely stop the Tesla billionaire’s hostile takeover, it means he’ll probably have to go through the board to do so, depending on which route he chooses.
“It would be very difficult for him to acquire Twitter unless the poison pill is addressed,” said a corporate counsel attorney.
While some may have dismissed his initial approach to the company as a gimmick, Musk has since signaled his seriousness by announcing a $46.5 billion financing package to fund his takeover offer.
“It seems clear that when proposing its financing plan [Musk is trying] to convince the board or possibly publicly pressure the board to stop bullying you and sit down and negotiate,” said Eric Talley, co-director of the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School.
Shareholder rights plans, commonly known as poison pills, were invented in the 1980s by Martin Lipton, co-founder of the New York law firm Wachtell, Lipton, Rosen & Katz. They provide companies with protection against corporate raiders by deterring them from owning large chunks of stock.
Under the poison pill adopted by Twitter’s board of directors last week, just days after Musk’s offer, it can flood the market with new shares by allowing existing investors to buy shares at a 50 percent discount if Musk, or any other investor, acquires a stake in the company greater than 15 percent.
That would dilute Musk’s stake and make it more expensive for him to accumulate the shares needed to wield power over the company.
“They are going to have the opportunity to make a massive purchase of Twitter shares at half price. . . which would be a significant dilution for Musk,” Talley said.
Historically, poison pills have been used as a defensive and negotiating tactic, rather than being activated. The expectation is that the Twitter board and Musk will eventually come to a negotiated solution.
Twitter can accept Musk’s offer or decide that it undervalues the company and choose to negotiate. This would involve discussions to agree on a price, after which the board would scrap the shareholder rights plan and proceed with a sale.
If the board doesn’t accept his initial offer, Tesla’s CEO can launch a tender offer, which Musk suggested he could do. This appeals directly to shareholders to sell, or tender, their shares at a specific price, and is typically used when a target company’s board will not participate in a takeover bid.
However, in order to buy shares from existing shareholders and maintain the backing of their Wall Street banks, Musk’s potential public offering is based on eliminating the poison pill. Wall Street banks, including Morgan Stanley, which have racked up $25.5 billion in debt from the Twitter deal, will only support a public offering on the condition that the shareholder rights plan is redeemed, and any changes in the terms will require your consent, according to the regulator. filings.
To do this, Musk will need the approval of the board, either through direct negotiations or by finding other ways to pressure them to agree.
If a large number of shareholders choose to sell their shares to Musk in the open public offering, the board could give in and scrap the mechanism.
“You can’t actually buy the shares until all the conditions are met. But if enough shareholders make an offer, that can create enough shareholder pressure on the board to make a deal with Musk,” said an M&A lawyer.
“It becomes a little bit more of a persuasion game and a pressure game,” Talley said.
Alternatively, Musk could try to install more favorable board members who could push to remove the poison pill, though he would have to wait until next year to nominate new people.
In a more hostile outcome, Musk could sue Twitter’s board for not acting in the best interests of shareholders. Twitter can also adopt the “just say no” defense and outright reject a sale, although both options are considered unlikely.
“Every hostile treatment eventually becomes friendly because. . . you can use any of those tools, some in combination with others, to create enough shareholder pressure to get the board to agree to a deal,” the M&A lawyer said.