Twitter’s decision to launch a poison pill defence has given its embattled board a shot at frustrating Elon Musk’s attempt to buy what he has dubbed the world’s “de facto public town square”.
Although the mechanism may not stop the Tesla billionaire’s hostile takeover altogether, it does mean he will probably need 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 dealt with,” said one corporate advisory lawyer.
While some may have brushed off his initial approach to the company as a stunt, Musk has since signalled his seriousness by announcing a $46.5bn financing package to fund his takeover bid.
“It seems clear that by putting forward his financing plan [Musk is trying] to either convince the board or possibly put public pressure on the board to stop stiff-arming him 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 New York law firm Wachtell, Lipton, Rosen & Katz. They provide protection to companies against corporate raiders by deterring them from owning large chunks of stock.
Under the poison pill adopted by Twitter’s board last week, just days after Musk’s offer, it can flood the market with new stock by allowing existing investors to buy shares at a 50 per cent discount if Musk — or any other investor — builds a stake in the company exceeding 15 per cent.
That would dilute Musk’s holding and make it more expensive for him to amass the shares needed to wield power over the company.
“They’re going to have a chance to have a fire sale purchase of Twitter stock at half price . . . which would be a significant dilution to Musk,” said Talley.
Historically, poison pills have been used as a defensive and bargaining tactic, rather than actually being triggered. The expectation is that Twitter’s board and Musk will ultimately reach a negotiated solution.
Twitter may accept Musk’s offer, or decide that it undervalues the company and choose to negotiate. This would involve discussions to agree a price, after which the board would remove the shareholder rights plan and proceed with a sale.
If the board does not accept his initial offer, the Tesla chief executive can launch a tender offer, which Musk has suggested he may do. This directly appeals to shareholders to sell — or tender — their shares at a specific price and is typically used when a target company’s board will not engage with a takeover bid.
Yet to actually buy stock from existing shareholders and maintain the backing of his Wall Street banks, Musk’s potential tender offer relies on removing the poison pill. The Wall Street banks including Morgan Stanley that have lined up $25.5bn in debt for the Twitter deal will only back a tender offer under the condition that the shareholder rights plan would be redeemed, and any change in terms would require their consent, according to regulatory filings.
To do this, Musk will need the board’s approval, either through direct negotiations or by finding other ways to pressure them into acquiescing.
If a large number of shareholders opt to sell their stock to Musk in the open tender offer, the board might cave and remove the mechanism.
“He can’t actually buy the shares until all the conditions are satisfied. But if enough shareholders tender, that can create enough shareholder pressure on the board to do a deal with Musk,” said an M&A lawyer.
“It becomes a little bit more of a persuasion game and a pressure game,” said Talley.
Alternatively, Musk could attempt to install more favourable board members who could push to remove the poison pill — although he would have to wait until next year to nominate new individuals.
In a more hostile outcome, Musk could sue Twitter’s board for not acting in the best interests of shareholders. Twitter may also adopt the “just say no” defence and categorically refuse a sale, although both of these options are deemed unlikely.
“Every hostile deal ultimately 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,” said the M&A lawyer.