Persuasion and Pressure: How Elon Musk Can Detoxify Toxic Twitter Pills
Twitter’s decision to launch a defense of toxic pills gave its embattled council an opportunity to thwart Elon Musk’s attempt to purchase what he called the world’s “virtual public city square.”
While the mechanism may not completely stop the Tesla billionaire’s hostile takeover, it does mean that he will probably need to run across the board to do so, depending on which path he chooses.
“It will be very difficult for him to get on Twitter unless the toxic pill is dealt with,” said one of the consulting attorneys at the firm.
While some have dismissed his initial approach to the company as a stunt, Musk has since signaled his seriousness by announcing a $46.5 billion financing package to fund the takeover bid.
“Obviously by putting up his own financing plan [Musk is trying] “Either to convince the board of directors or perhaps to put public pressure on the board to stop its hard-core armament and sit down and negotiate,” said Eric Talley, co-director of the Milstein Center for Global Markets and Corporate Ownership at Columbia Law School.
Shareholder equity schemes – known as poison pills – were invented by Martin Lipton, co-founder of the New York law firm Wachtell, Lipton, Rosen & Katz in the 1980s. It protects corporations from corporate raiders by preventing them from owning large portions of stock.
Under the pill approved by Twitter’s board last week, just days after Musk’s presentation, the market could be flooded with new shares by allowing existing investors to buy shares at a 50 percent discount if Musk — or any other investor — builds a stake in the company that exceeds 15 per cent.
This would dilute Musk’s ownership and make it more costly for him to hoard the shares needed to control the company.
“They will have the opportunity to get a quick sell-off of Twitter shares at half the price… which would be a huge relief for Musk,” Talley said.
Historically, poison pills were used as a defensive and bargaining tactic, rather than actually releasing them. The board of Twitter and Musk is expected to eventually come to a negotiated solution.
Twitter may accept Musk’s offer, or decide it is undervaluing the company and choose to negotiate. This may include discussions to agree a price, after which the board of directors removes the equity plan and proceeds with the sale.
If the board doesn’t accept his initial offer, Tesla’s CEO can launch a bidding offer, which Musk has suggested he might do. This appeals to shareholders to directly sell – or offer – their shares at a set price, and is usually used when the target company’s board of directors is not dealing with a takeover offer.
However, in order to actually buy shares from existing shareholders and maintain the support of Wall Street banks, Musk’s potential bid in the bid depends on removing the toxic pill. Wall Street banks, including Morgan Stanley that set aside $25.5 billion in debt for the Twitter deal, will back the tender offer only on the condition that the equity plan is redeemed, and any change in terms requires their approval, according to the regulatory filing.
To do so, Musk would need the approval of the board of directors, either through direct negotiations or by finding other ways to pressure them to comply.
If a large number of shareholders choose to sell their shares to Musk in an open bid offer, the board could collapse and remove the mechanism.
“He can’t actually buy shares until all conditions are met. But if there is enough shareholder giving, that can create enough shareholder pressure on the board of directors to cut a deal with Musk,” said an M&A attorney.
“It becomes little more than a game of persuasion and a game of pressure,” Talley said.
Alternatively, Musk could try to appoint more favorable board members who could lobby to remove the toxic pill — although he will have to wait until next year to nominate new individuals.
In a more hostile outcome, Musk could sue Twitter’s board of directors for not acting in the best interests of shareholders. Twitter may also adopt a “just say no” defense and flatly refuse to sell, although both options are considered unlikely.
“Every hostile deal eventually becomes friendly because . . . you can use any of these tools, some in combination with others, to create enough shareholder pressure to get the board of directors to agree to a deal,” said the M&A attorney.