The so-called “poison pill” that Twitter brandished against Elon Musk represents a mechanism of proven effectiveness that would force the American billionaire to enter negotiations to acquire the platform, rather than do it in a non-consensual manner.
To prevent Musk from taking over Twitter, the company’s board of directors plans to activate the “poison pill” if the CEO of Tesla buys more than 15% of the company’s shares on the stock exchange.
Musk essentially owns 9.2% of the company’s shares, and announced Thursday that he had secured the $46.5 billion needed to make an offer on the remaining shares.
Any acquisition of more than 15% of the company’s shares would allow all shareholders except for Musk to buy shares at half the price, which would flood the market with traded shares, and thus reduce the percentage of Musk’s shares, making his acquisition of Twitter therefore more difficult.
It would then become almost impossible for the billionaire to take control of the company, even though he would spend much more than he was supposed to.
Eric Werley, assistant professor of financial affairs at Western Washington University, explains that the decrease in the percentage of ownership of a share of shares due to the issuance of new shares resulting from this defensive measure generally plays its deterrent role.
History of the “poisonous pill”
Business lawyer Martin Lipton devised the “poison pill” 40 years ago to counter a wave of buyouts on Wall Street.
Lipton told The Deal in 2011 that it was the “age of corporate raiders”, a new type of investor mastering financial engineering, from the investment firm Kohlberg Kravis Roberts to Carl Icahn, via Kirk Kerkorian.
After the procedure was quickly challenged, it was first legalized in 1985 by the Delaware Supreme Court, on which Twitter relies, even though the company is located in California.
University of Washington professor John Karpov explains that half of the listed companies were set up in Delaware’s lax tax system, which has bolstered jurisprudence about its poison-grain measures.
He adds, “Unless there is something unusual in Twitter’s plan, which he has ruled out, Musk will have little chance of winning in court and removing the mechanism.”
“I don’t think the matter will go to court because Elon Musk has no legal arguments to win,” said Brian Quinn, assistant professor at Boston College.
negotiation
Quinn points out that the first alternative to Musk’s acquisition of the majority of the company is to change the board of directors, and install members allied with the businessman.
But the agenda for Twitter’s next public meeting on May 25 has already been set, which means Elon Musk will have to wait for the next meeting in 2023.
The second obstacle facing him is that the removal of the board of directors is only possible in batches, and while the membership of some members ends this year, others continue in their positions until 2023, 2024 or 2025, and Musk should wait until at least 2024 to obtain the majority of seats in Board of Directors.
“No buyer has previously overcome the ‘poison pill’ mechanism by replacing the board of directors in two back-to-back elections,” says Brian Quinn.
Quinn believes that Musk’s only option is to negotiate with the board of directors, most likely by proposing a higher bid to take over the company, without guaranteeing the success of this move.
And if Musk does resort to negotiations, he will not be able to count on Twitter founder and former CEO Jack Dorsey unless there is a quick settlement.
Dorsey has several times publicly expressed sympathy for the 50-year-old billionaire, even echoing Musk’s criticisms of the board.
After his resignation last November, Jack Dorsey announced that he would not run for a new term as director, and would leave the Board of Directors after the general meeting.
John Karpov points out that Musk, in parallel with the negotiations, should start making his case to shareholders, a step that the billionaire originally started, ironically, via Twitter.
the crowd
“I think his popularity with a lot of people will help him,” Karpov says. “I wouldn’t be surprised if he rallied small investors to help him put pressure on the board.”