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In a surprising reversal, Elon Musk, the CEO of Tesla and largest shareholder of Twitter, abandoned his plan to join the social media company’s board of directors and instead offered to buy the company outright and take it private.
Dare we say it, the internet is all a-twitter. Some people are joyous; others are livid and horrified.
Musk’s primary goal seems to be liberalizing Twitter’s free speech policies. To do that, he would need to acquire substantial control of the company.
We previously posted about the limited control Musk would have as a large shareholder and a director on Twitter’s 12-member board. In stark contrast, he would have total control if he owned the company.
We have no idea how this is going to play out. But let’s look at how we got here and guess what might happen next.
Musk’s Offer
On April 14, Musk issued an offer to Twitter’s board. Musk expressed a lack of “confidence in management,” and said that changes he believes Twitter needs to make can only be made if he buys the company and takes it private.
He proposed buying all shares of Twitter for about $43 billion. According to an SEC filing, this represents his “best and final offer.” He said that if the board rejects his offer, he would have to reconsider his “position as a shareholder.”
In response, Twitter said that the board of directors would review the offer. Musk answered by tweeting that taking Twitter private “should be up to shareholders, not the board,” and that he would try to “keep as many shareholders in privatized Twitter” as legally possible.
And that is where we are on the afternoon of April 15. Now, get ready for some guessing.
What Is Twitter’s ‘Poison Pill’?
The board could, theoretically, accept the offer. But that became unlikely when the board adopted a legal mechanism called a “poison pill” to prevent Musk from increasing his stake in the company.
A poison pill, also known as a shareholder’s rights agreement, is a form of defense against “hostile” corporate takeovers like Musk’s. It is a legal mechanism that, when triggered, permits existing shareholders to buy new shares of stock at a substantial discount. This increases their ownership share. The unwelcome acquirer, who doesn’t get a discount, has to pay a lot more on the open market to get the stock they’d need to get the same ownership share.
Since your shareholder’s right to vote on who serves as directors of the company depends on the amount of stock you own, a poison pill essentially dilutes the voting power an acquirer would have. This makes it much harder for them to replace the number of directors necessary to change corporate policy or approve a takeover offer like Musk’s.
In Twitter’s poison pill, any attempt by a shareholder to acquire more than 15% of company shares would trigger the plan.
What Are Musk’s Options?
Assuming the board rejects his offer, Musk has a few options. He could give up his chance to own Twitter, which seems unlikely given his expressed desire to change Twitter’s free speech policies.
He could raise his price. Although Musk has changed his mind before, this also seems unlikely — In his filing, Musk said this was his best “and final” offer.
A more likely scenario is that he takes the bid directly to the other shareholders in what is called a tender offer. They could collectively vote to approve the sale. However, at least one large shareholder, a Saudi prince, has said that the price Musk offered was too low and that he rejected the offer.
Musk and other shareholders could, in theory, take Twitter to court and force the board to make an argument that they are acting in shareholders’ best interests in rejecting his offer.
What Then?
It’s hard to say what happens then. It ultimately depends on what the shareholders want to do. Twitter shares closed on April 14 at $45.08, so Musk’s price would seem to be a great deal for them. We will see if they feel Twitter’s current corporate policies are more important to them than their bottom line.
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