Will Twitter’s poison pill be too hard for Elon Musk to swallow?
The so-called “poison pill” that Twitter has proposed to use against Elon Musk’s potential hostile takeover is a mechanism with a proven track record that could force the outspoken entrepreneur into negotiations.
To stop a takeover, the board plans to activate the pill if the Tesla CEO owns more than 15 percent of Twitter.
He already owns 9.2 percent of the company and said Thursday he had the $46.5 billion needed to bid on the remainder.
Such a “pill” would allow other Twitter shareholders to buy shares at half price, increasing the amount of shares outstanding and weakening Musk’s influence.
It would then be almost impossible for him to take complete control of the company without having to spend significantly more than he originally planned.
“The dilution created by this defense has generally achieved its intended deterrent effect,” said Eric Wehrly, associate professor of finance at Western Washington University.
The “poison pill” was invented by business lawyer Martin Lipton 40 years ago to counter a wave of hostile takeovers on Wall Street.
“It was the age of corporate raiders,” Lipton told The Deal media outlet in 2011, of investors ranging from Carl Icahn to Kirk Kerkorian.
Quickly challenged in court, the practice was first ruled legal in 1985 by the Delaware Supreme Court — a tax-friendly state where Twitter, although officially a California resident, is incorporated.
“Delaware is home to about half of the publicly traded companies in the US and has a fairly well-established poison pill enactment law,” said Jon Karpoff, finance professor at the University of Washington.
“Unless there’s something unusual about Twitter’s pill, which I highly doubt… Musk is unlikely to have a successful legal challenge,” he said.
Brian Quinn, an associate law professor at Boston College, doesn’t think the matter will even end up in court.
“Elon Musk has no case,” he said.
Negotiate and collect
An alternative to taking over the majority of the company, Quinn says, would be for Musk to change the composition of the board and add new members that are more in line with his vision for Twitter.
But the agenda for Twitter’s next AGM on May 25 is already set, meaning Musk would have to wait until the next AGM in 2023 to even bring it up.
And the board can only be dismissed in batches anyway.
Some members’ terms expire this year, while others will hold their positions until 2023, 2024 or 2025.
Musk wouldn’t be able to win over a majority of the board until at least 2024.
According to Quinn, “there is no record of an acquirer breaking the pill by replacing the board with two consecutive elections.”
“The only option for an acquirer is to negotiate with the board,” Quinn said, likely with an even higher offer but no guarantee of success.
And in the event of a negotiation, Musk could not count on the support of former Twitter CEO and co-founder Jack Dorsey unless there is a quick fix.
Dorsey, who previously professed his affinity with the billionaire, announced after resigning in November that he would not run for another term as director and would step down after this year’s meeting.
In parallel with the official negotiations, Karpoff said Musk would need to start making his case to shareholders, a task that has already begun — primarily through tweeting.
“And I think his personal popularity with a lot of people will help them with that,” Karpoff said.
“I wouldn’t be surprised if we even involved a number of small investors in the fight to buy Twitter stock and join the attempt to pressure board members into making a deal with Musk.”
(This story was not edited by NDTV staff and is auto-generated from a syndicated feed.)