Twitter's poison pill too hard to swallow for Elon Musk?
Sylvie Claire / April 22, 2022
The poison pill brandished by Twitter against Elon Musk is a mechanism with proven effectiveness, which could force the fiery entrepreneur to negotiate if he cannot force his way in. To prevent a takeover, the board of directors plans to activate the pill if the Tesla CEO reaches 15% of Twitter's capital on the stock market.
It currently owns 9.2% of the company and said on Thursday that it had raised the necessary financing to launch an offer for the rest, for a total of $46.5 billion.
From 15%, all shareholders other than Elon Musk could then buy shares at half price, which would increase the number of shares in circulation and dilute the weight of the insatiable billionaire. It would then be almost impossible for him to take control of the company, unless he spent a much larger sum than originally planned. The dilution created by this defense usually acts as a deterrent, explains Eric Wehrly, assistant professor of finance at Western Washington University.
The poison pill was invented 40 years ago by corporate lawyer Martin Lipton to counter the wave of hostile takeovers taking place on Wall Street.
Quickly challenged in court, the practice was validated for the first time in 1985, by the Supreme Court of Delaware, on which Twitter depends, even though the group is Californian. Half of the listed companies were created in this state, with its advantageous tax system, which has well established the jurisprudence on poison pills, explains Jon Karpoff, professor at the University of Washington. Unless there's something unusual about the pill, which I doubt, (...) Mr. Musk would have little chance of winning in court and getting the scheme overturned, he believes. I don't think it will go to court, because Elon Musk has no legal basis to triumph, agrees Brian Quinn, an assistant professor at Boston College University.
The first alternative to acquiring a majority of the capital is to change the board of directors, explains Brian Quinn, and to install allied members. But the list of resolutions for the next general meeting of Twitter, set for May 25, has already been decided, which means that Elon Musk could not intervene before the next general meeting, in 2023.
The second obstacle is that the Board of Directors can only be renewed in tranches. Some members finish their term this year, while others are guaranteed to be there until 2023, 2024 or even 2025. To obtain a majority on the board, Elon Musk would have to wait at least until 2024.
For the law professor, given the configuration, the only option is to negotiate with the board of directors, presumably with an upwardly revised offer, with no guarantee of success. In case of talks, Elon Musk will not be able to count on the iconic former Twitter executive Jack Dorsey, unless a quick settlement is reached.
The co-founder of the platform has several times publicly stated his sympathy for the 50-year-old billionaire, to the point of echoing his criticism of the board. After his resignation last November, Jack Dorsey announced that he would not seek another term as a director and would leave the board at the end of the AGM.
Often, alongside negotiations, according to Jon Karpoff, potential buyers campaign, which Elon Musk has already begun to do, mainly, ironically, using Twitter.
And I think his popularity among a lot of people will help him, the academic anticipates. I wouldn't be surprised if he rallies small holders (...) to help him put pressure on the board.