Twitter’s choice to launch a poison tablet defence has given its embattled board a shot at irritating Elon Musk’s try to purchase what he has dubbed the world’s “de facto public town square”.
Although the mechanism might not cease the Tesla billionaire’s hostile takeover altogether, it does imply he’ll in all probability have to undergo the board to take action, relying on which route he chooses.
“It would be very difficult for him to acquire Twitter unless the poison pill is dealt with,” mentioned one company advisory lawyer.
While some might have dismissed his preliminary strategy to the corporate as a stunt, Musk has since signalled his seriousness by asserting a $46.5bn financing package deal to fund his takeover bid.
“It seems clear that by putting forward his financing plan [Musk is trying] to either convince the board or possibly put public pressure on the board to stop stiff-arming him and sit down and negotiate,” mentioned Eric Talley, co-director of the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School.
Shareholder rights plans — generally often called poison drugs — have been invented within the Eighties by Martin Lipton, co-founder of New York legislation agency Wachtell, Lipton, Rosen & Katz. They present safety to corporations in opposition to company raiders by deterring them from proudly owning massive chunks of inventory.
Under the poison tablet adopted by Twitter’s board final week, simply days after Musk’s supply, it might flood the market with new inventory by permitting present buyers to purchase shares at a 50 per cent low cost if Musk — or every other investor — builds a stake within the firm exceeding 15 per cent.
That would dilute Musk’s holding and make it dearer for him to amass the shares wanted to wield energy over the corporate.
“They’re going to have a chance to have a fire sale purchase of Twitter stock at half price . . . which would be a significant dilution to Musk,” mentioned Talley.
Historically, poison drugs have been used as a defensive and bargaining tactic, somewhat than truly being triggered. The expectation is that Twitter’s board and Musk will finally attain a negotiated resolution.
Twitter might settle for Musk’s supply, or resolve that it undervalues the corporate and select to barter. This would contain discussions to agree a worth, after which the board would take away the shareholder rights plan and proceed with a sale.
If the board doesn’t settle for his preliminary supply, the Tesla chief government can launch a young supply, which Musk has instructed he might do. This immediately appeals to shareholders to promote — or tender — their shares at a selected worth and is usually used when a goal firm’s board won’t interact with a takeover bid.
Yet to really purchase inventory from present shareholders and keep the backing of his Wall Street banks, Musk’s potential tender supply depends on eradicating the poison tablet. The Wall Street banks together with Morgan Stanley which have lined up $25.5bn in debt for the Twitter deal will solely again a young supply below the situation that the shareholder rights plan could be redeemed, and any change in phrases would require their consent, based on regulatory filings.
To do that, Musk will want the board’s approval, both via direct negotiations or by discovering different methods to stress them into acquiescing.
If numerous shareholders choose to promote their inventory to Musk within the open tender supply, the board would possibly cave and take away the mechanism.
“He can’t actually buy the shares until all the conditions are satisfied. But if enough shareholders tender, that can create enough shareholder pressure on the board to do a deal with Musk,” mentioned an M&A lawyer.
“It becomes a little bit more of a persuasion game and a pressure game,” mentioned Talley.
Alternatively, Musk may try to put in extra beneficial board members who may push to take away the poison tablet — though he must wait till subsequent yr to appoint new people.
In a extra hostile final result, Musk may sue Twitter’s board for not appearing in the most effective pursuits of shareholders. Twitter may additionally undertake the “just say no” defence and categorically refuse a sale, though each of those choices are deemed unlikely.
“Every hostile deal ultimately becomes friendly because . . . you can use any of those tools, some in combination with others, to create enough shareholder pressure to get the board to agree to a deal,” mentioned the M&A lawyer.