POISON PILL

Twitter Armed Against A Possible Hostile Takeover BY Elon Musk

     Twitter, the microblogging platform’s board, has armed itself against a possible hostile takeover by taking recourse to what is called a “limited-duration shareholder rights plan”, also referred to as a “poison pill” a defensive strategy familiar to boardrooms trying to fend off takeovers but less familiar to everyday investors countered Elon Musk’s offer to buy the company for more than $43 billion for $54.20/share in cash for a 9.2 per cent stake in Twitter. The board voted unanimously to adopt the plan. The move would allow existing Twitter shareholders except for Musk, the Chief of Tesla, to buy additional shares at a discount, thereby diluting Musk's stake in the company and making it harder for him to corral a majority of shareholder votes in favour of the acquisition. 

    The word ‘Poison pill’ comes from a wartime practice, of soldiers or spies carrying a vial of poison to ingest in case of capture. Similarly, when a company management or board fears a hostile takeover, they take a ‘poison poll’-an action that could be bad for the financial interest of the shareholders-to resist the bid. The method, known as a “poison pill” in the finance world, essentially allows existing shareholders to purchase freshly issued shares in a company at a discount to the trading price, effectively making any possible buyout plan extremely costly and prohibitive for the party planning a hostile takeover. This defence mechanism was developed in the 1980s as company leaders, facing corporate raiders and hostile acquisitions, tried to defend their businesses from being acquired by another enterprise, person or group. In this case, the move will prevent anyone from having more than a 15 per cent stake in Twitter by allowing existing shareholders to buy additional shares at a discount.

    Musk has gone back and forth on this. He says that his latest plan is to buy Twitter outright and then take it private “to restore its commitment” to what he calls “free speech”. But his offer, which seemed to have gotten a clear thumbs down from the investors, raises multiple questions, including whether he’s serious in the first place and does he have the funds to do this? His objective for this move to take over Twitter is also fuzzy, including his promise of ensuring that it lives up to its potential as a “platform for free speech”. Musk insisted on Thursday that his plan was triggered by the realization that “having a public platform that is maximally trusted and broadly inclusive is extremely important for the future of the civilization”.

    Netflix successfully fended off billionaire investor Carl Icahn in November 2012, using a poison pill that would have made it more expensive for Icahn, or any other person or group, to accumulate more shares of Netflix if they acquired 10 percent of the company without the approval of its board. Almost a year later, in October 2013, Men’s Wearhouse survived an acquisition attempt by Jos. A. Bank Clothiers after it adopted a poison pill. (Men’s Wearhouse then acquired Jos. A. Bank in March 2014, and the owner of both companies filed for bankruptcy in August 2020.) In September 1985, in the wake of rumours that consumer goods company Philip Morris was targeting it, the McDonald’s Corp. said it had adopted a poison pill plan to prevent “abusive takeover tactics.” (The company said the plan was not adopted in response to any known offer.) A few years later, The Walt Disney Co. announced it had adopted one, calling it “a sound and reasonable means of safeguarding the interests of all stockholders.”

    The plan, which will expire on April 14, 2023, does not prevent Twitter's board from engaging with parties or accepting an acquisition proposal if they believe it is in the best interest of the company and its shareholders. The proposal of Twitter’s board to block Musk from buying the company out could also go either way, given that the billionaire could mobilise a proxy fight with thousands of retail investors backing him in voting the current set of directors out. If the current Twitter board takes actions contrary to shareholder interests, they would be breaching their fiduciary duty. The liability they would thereby assume would be titanic in scale. In due course of time, it will be riveting to watch what course of action could be taken by either side.