On April 14, 2022, Elon Musk – the billionaire CEO of Tesla and SpaceX – made an unsolicited bid to buy Twitter for $43 billion. The following day, Twitter’s board voted unanimously to adopt a limited duration shareholder rights plan, or “poison pill.” Such a move is a common way for target companies to fend off a possible hostile takeover by making them look less attractive to the potential acquirer.
Under the new structure, if Musk bought more than 15% of the company, Twitter would flood the market with new stock that all other shareholders could buy at a discounted price. That would immediately dilute Musk’s stake and make it significantly more expensive for him to buy the company.
The plan will remain in place until April 14, 2023, and will not stop Twitter from holding talks with any potential buyer. It will also give the company more time to negotiate a deal that the board believes best reflects Twitter’s value – in fact, the company has continued its talks with Musk.
The term “poison pill” refers to a defense tactic that makes a company’s shares unfavorable, or difficult to accept, to the acquiring firm or individual. A reference to the cyanide capsules spies are supposed to swallow when they are captured, the poison pill was invented in 1982 by famed corporate lawyer Martin Lipton.It came into widespread practice after the Delaware Supreme Court affirmed its legality in a landmark 1985 case.
This powerful corporate defense has been adopted by thousands of companies since then, either as a general policy or in response to takeover threats from activist shareholders. Poison pills significantly raise the cost of acquisitions in order to deter such attempts. The mechanism protects minority shareholders and avoids the change of control of company management.
Musk already owns a more than 9% stake in Twitter, as revealed in a Securities and Exchange Commission filing. Soon after his stake became public, Twitter’s CEO Parag Agrawal announced plans for Musk to join the board. Several days later, Musk reversed course and decided not to join the board.
Musk has suggested that he is interested in influencing, if not changing, the company's moderation policies, which govern the content shared on the platform. In an interview at a TED conference the day he made his offer public, he argued that taking Twitter private would allow more free speech to flow on the platform. However, many Twitter employees fear that Musk's views on free speech could disrupt their efforts to make the platform a place for civilized discourse.
Investors rarely try to get around a poison pill by buying shares beyond the threshold set by the company, according to securities experts. Should Musk decide not to buy Twitter, does he have the power to change the company’s policies as its largest shareholder?
Twitter manages its business under the direction of its board of directors. Although the company's officers manage its day-to-day affairs, directors make major decisions, including appointing officers and setting their compensation and setting the policies that officers implement, including those relating to products, services, wages, and labor relations. However, directors do not have unlimited powers.
Generally, board members have equal voting rights, and any action on the part of Twitter's board requires a majority vote. If Musk were to become a board member, he could vote and serve on committees, but he would be one of twelve directors. So, while he holds a lot of Twitter stock, he really cannot change company policy on his own without owning a majority of the stock.
However, while Musk may currently have limited legal power as a shareholder, he has 90 million Twitter followers. His tweets are so influential that he is bound by a 2018 consent decree to have lawyers review certain tweets before he sends them (Musk has asked a judge to terminate the decree). It may be that the scope of his audience, not his legal powers, will empower Musk to influence Twitter policy.
NOTE: At the time this blog was posted, Musk secured a deal to buy Twitter for $54.20 a share – valuing the firm at roughly $44 billion. What this means for the future of the social media network is still to be determined.
If you are a business owner with questions or concerns about dealing with a potentially hostile takeover, please contact us at 973.707.3322 or via email at LFarber@LFarberLaw.com.
The contents of this writing are intended for general information purposes only and should not be construed as legal advice or opinion in any specific facts or circumstances.