Twitter’s “poison pill” too hard for Elon Musk to swallow?

published on Friday April 22, 2022 at 08:17

The “poison pill” Twitter waved in Elon Musk’s face is a mechanism with proven effectiveness, which could force the fiery entrepreneur to negotiate for lack of power.

To avoid a takeover, the board of directors plans to activate the “pill” if Tesla’s CEO reaches 15% of Twitter’s capital on the exchange.

He currently owns 9.2% and said on Thursday that he had secured the necessary funding to make an offer for the remainder, for an envelope of $46.5 billion.

Starting at 15%, all shareholders except Elon Musk would then be able to buy shares at half price, increasing the number of shares in circulation and reducing the weight of the insatiable billionaire.

It would then be nearly impossible for him to take control of the company except to spend a significantly higher amount than initially planned.

“The dilution created by this defense generally plays a deterrent role,” 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 on Wall Street.

“It was the era of + raiders +,” explained to The Deal, the attorney in 2011, an era epitomized by these investors of a new breed, experts in financial settlements, from KKR to Carl Icahn, via Kirk Kerkorian.

The practice was quickly challenged in court and was first validated in 1985 by the Delaware Supreme Court, on which Twitter relies, even if the group is Californian.

“Half of publicly traded companies are founded in this state,” with advantageous taxation, “which has well entrenched the poison pill case law,” explains Jon Karpoff, a professor at the University of Washington.

“Unless there is something unusual in the pill, which I doubt, (…) Mr. Musk would stand little chance of getting justice” and have the mechanism cancelled, he believes.

“I don’t think it will go to court because Elon Musk has no legal basis” to prevail, agreed Brian Quinn, an assistant professor at Boston College University.

– Negotiate and Collect –

The first alternative to acquiring a majority of the capital “is to change the board of directors,” explains Brian Quinn, and install allied members there.

But the list of resolutions for Twitter’s next general meeting, set for May 25, has already been set, meaning Elon Musk couldn’t intervene before the next AGM in 2023.

Second obstacle, the board of directors can only be renewed in installments. Some members will end their terms this year, while others are guaranteed until 2023, 2024 or even 2025. To get a majority on the board, Elon Musk would have to wait at least until 2024.

“There is no precedent for a buyer to circumvent the pill by replacing the board in two consecutive elections,” cautions Brian Quinn.

For the law professor, given the configuration, “the only option is to negotiate with the board of directors,” presumably by proposing an upwardly revised offer, with no guarantee of success.

Elon Musk cannot count on emblematic former Twitter leader Jack Dorsey in negotiations unless a quick settlement is reached.

The platform’s co-founder has publicly expressed his condolences to the 50-year-old billionaire on several occasions, going to the point of reiterating his criticism of the board of directors.

Following his resignation last November, Jack Dorsey announced that he would not run for another term as director and would leave the board at the end of the AGM.

Often parallel to the negotiations, according to Jon Karpoff, the campaign for potential buyers, which Elon Musk has already started, mainly ironically, via Twitter.

“And I think his popularity with many people will help him,” the academic anticipates. “I wouldn’t be surprised if he collected small holders (…) to help him put pressure on the board”.

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