Last week, Elon Musk launched a $43 billion hostile takeover bid to buy Twitter Inc., a public company listed on the NYSE. However, Musk’s offer to buy the company and make it private was met with the company’s Board of Directors (“Board”) issuing a “poison pill” the following day. The “poison pill” for Twitter, a limited duration shareholder rights plan, was unanimously approved by Twitter’s Board, indicating that the Board intends to oppose Musk’s bid and to defend the company.
What is a poison pill?
A shareholder rights plan (“SRP”) such as the one adopted by Twitter is often referred to as a “poison pill” and is typically used as a defence by a public company against a hostile takeover bid. Typically, a SRP is triggered by the acquisition by one person, group or entity/company of shares above a certain threshold. Once triggered, the plan allows shareholders to acquire company shares at a discount to dilute the unwanted prospective buyer’s shareholdings. Because this is a defensive tactic and ultimately would result in the dilution of the prospective buyer’s holdings, it is meant to discourage shareholdings above a certain threshold. Although a SRP doesn’t make a hostile takeover impossible, it makes it less attractive to the prospective buyer because it would make the bid more expensive (due to the increased number of shares).
Twitter’s SRP is triggered by any person or group acquiring beneficial ownership of at least 15% of Twitter’s outstanding common stock without the Board’s approval, which will allow other shareholders to purchase additional shares at a discount. It is a “limited” SRP because it will expire on April 14, 2023. However, the SRP would still allow the Board to accept an acquisition offer that it deems to be in the best interests of the company and its shareholders.
Although Twitter’s Board has not publicly rejected Musk’s offer, the fact that it enacted a SRP immediately following his takeover bid indicates it is likely to do so. Musk’s shareholdings are currently more than 9%, so any further acquisition by him of Twitter shares above 14.9% would result in the SRP being triggered.
Potential tender offer
Musk has publicly commented that if his offer is rejected by the Board, he would likely sell his shareholdings of the company as he didn’t have confidence in its management. However, that doesn’t mean that he has no further options in his bid to take over the company. He could also launch a tender offer for the company, whereby his offer is made publicly to the shareholders directly (not to the Board) for their shares at a set price, usually within a specified time period. Tender offers can also include conditions, such as being dependent on a certain number of shares being sold for the prospective buyer to acquire a controlling interest in the company.
Twitter’s SRP would still be triggered by a tender offer for the acquisition of shares above the threshold (or by the actual acquisition of the shares above the threshold), meaning that the SRP would also be triggered by a potential tender offer by Musk for at least 15% of the outstanding common shares in the company. A tender offer would likely require Musk to offer a higher price for the shares than his current offer of $54.20 a share.
Twitter’s potential responses
Although Twitter’s Board has yet to publicly respond, industry insiders and analysts expect Musk’s offer to be rejected. However, the Board could attempt to negotiate a more favourable share purchase price from Musk, or take this as an opportunity to solicit competing bids. The fact that other prospective buyers are being discussed makes this an interesting saga to watch over the upcoming weeks.
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