Twitter does not want to become a plaything of the world’s richest person.
So on Friday, it turned to a tried-and-tested corporate defense mechanism invented in the 1980s — the heyday of the corporate raider — to block a potential takeover attempt by Elon Musk and buy its board some time.
The mechanism, known as a poison pill, has a simple intention: to make it less palatable for a potential buyer to pursue the target company if the buyer accumulates shares above a certain threshold. In Twitter’s case, if Mr. Musk bought more than 15 percent of the company, Twitter would flood the market with new stock that all shareholders except Mr. Musk could buy at a discounted price.
That would immediately dilute Mr. Musk’s stake and make it significantly more expensive for him to buy the company. Mr. Musk currently owns a little more than 9 percent of Twitter’s stock.
Twitter said its plan would be in place for just shy of one year. The tool will not stop the company from holding talks with any potential buyer, and will give it more time to negotiate a deal that Twitter’s board believes best reflects the company’s value.
The strategy “does not mean that the company is going to be independent forever,” said Drew Pascarella, a senior lecturer of finance at Cornell University. “It just means that they can effectively fend off Elon.”
Twitter is weighing whether to invite bids from others, two people close to the company said. Should it decide to court buyers, Silver Lake, a private equity firm that already owns a significant stake in Twitter, could be a possibility, the people said. Silver Lake, a technology-focused buyout fund, has more $90 billion in assets under management, and a managing partner there, Egon Durban, sits on Twitter’s board.
Silver Lake has come to Twitter’s rescue before. In 2020, when Elliott Management, an activist investor, amassed shares in Twitter and wanted it to make changes, Silver Lake helped the parties reach a compromise. As part of the deal, Silver Lake invested $1 billion in Twitter.
But Silver Lake also agreed at the time not to acquire more than 5 percent of the company, so Twitter would have to waive that so-called standstill agreement before it could entertain any offer from Silver Lake. It’s also not clear whether Silver Lake, which has its own history with Mr. Musk, having worked on his unsuccessful effort to take Tesla private, will offer a deal or has the financing necessary to do so on its own.
Silver Lake declined to comment.
At least one other private equity firm, Thoma Bravo, is weighing a possible offer for Twitter, Reuters reported and a person familiar with Thoma Bravo confirmed.
Poison pills have been around for decades. The lawyer Martin Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz, invented the maneuver, also called a shareholder rights plan, in 1982. It was a way to shore up a company’s defenses against unwanted takeovers by so-called corporate raiders like Carl Icahn and T. Boone Pickens.
They have since become a part of the corporate tool kit in America. Netflix adopted a poison pill in 2012 to stop Mr. Icahn from buying up its shares. Papa John’s used one against the pizza chain’s founder and chairman, John Schnatter, in 2018.
Investors rarely try to get around a poison pill by buying shares beyond the threshold set by the company, according to securities experts. One said it would be “financially ruinous,” even for Mr. Musk.
But Mr. Musk, who is worth more than $250 billion and is the chief executive of Tesla and SpaceX, rarely abides by precedent. He announced his intention to acquire Twitter on Thursday, making public an unsolicited bid worth more than $40 billion. In an interview at a TED conference later that day, he took issue with Twitter’s moderation policies, which govern the content shared on the platform.
Twitter is the “de facto town square,” Mr. Musk said, adding that “it’s really important that people have the reality and the perception that they are able to speak freely within the bounds of the law.” Twitter currently bans many types of content, including spam, threats of violence, the sharing of private information and coordinated disinformation campaigns.
Mr. Musk argued that taking Twitter private would allow more free speech to flow on the platform. “My strong intuitive sense is that having a public platform that is maximally trusted and broadly inclusive is extremely important to the future of civilization,” he said during the TED interview. He also insisted that the algorithm Twitter uses to rank its content, deciding what hundreds of millions of users see on the service every day, should be public for users to audit.
Mr. Musk’s concerns are shared by many executives at Twitter, who have also pressed for more transparency about its algorithms. The company has published internal research about bias in its algorithms and funded an effort to create an open, transparent standard for social media services.
On Friday, Twitter said its board, which includes Jack Dorsey, a co-founder of Twitter who is friendly with Mr. Musk, voted unanimously to approve the shareholder rights plan. Twitter is working with two Wall Street banks, Goldman Sachs and JPMorgan Chase, people familiar with the matter said, as it weighs its options. Mr. Musk is working with Morgan Stanley.
Mr. Musk said at the TED conference that if Twitter’s board rejected his offer, he had a Plan B, though he did not share it. Already, analysts have said that his bid — which offers significantly more per share than the current stock price but is well below its peak last year — may undervalue the company and that he may need to raise it. They have also raised concerns about Mr. Musk’s ability to cobble together financing.
Mr. Musk could challenge the poison pill in court, but that’s unlikely to be successful, said Edward Rock, a professor of corporate governance at the New York University School of Law.
“The first question will be: Does this bid pose a threat to Twitter and shareholders? And there are lots and lots of arguments they can make that it does pose a threat,” Mr. Rock said.
Mr. Musk seemed to be girding for a protracted fight. When he notified the board of his bid on Wednesday, he said that it was his “best and final offer” and that he would “reconsider my position as a shareholder” if it was rejected.
But at the TED conference on Thursday, he acknowledged that he did not like to lose. And later in the day, he took to his favorite social media platform: “Taking Twitter private at $54.20 should be up to shareholders, not the board,” he tweeted, alongside a Yes/No poll.
Taking Twitter private at $54.20 should be up to shareholders, not the board
— Elon Musk (@elonmusk) April 14, 2022