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Facing a Hostile Takeover from Elon Musk, Twitter Adopts “Poison Pill” Defense

The poison pill shareholder rights agreement would go into effect if anyone, including Musk, attempted to purchase more than 15% of the company without board approval

elon musk twitter poison pill
Elon Musk, photo by Patrick Pleul/POOL/AFP via Getty Images
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    Twitter is hoping to fight back against a hostile takeover from Elon Musk with a corporate maneuver called a “poison pill” shareholder rights plan, which according to the New York Times has rarely been attempted by a tech company of this size.

    Developed in the 1980s as a tactic to hold off corporate raiders, a poison pill involves flooding the market with new shares. In this scenario, current shareholders devalue their own stake in the company in an effort to make acquiring a majority share both difficult and unprofitable. Such a strategy forces shareholders to buy more stock just to maintain their current position, but hey, they don’t call it a poison pill for nothing.

    Most publicly traded entities are theoretically susceptible to a hostile takeover — that is, an attempt to acquire an ownership stake against the wishes of current management. Musk hoped to accomplish it by making an offer that shareholders couldn’t refuse, proffering $54.20 per share while Twitter had been trading at about $45. All told, Musk was putting $43 billion on the table. “It’s a high price and your shareholders will love it,” he wrote in an SEC filing.

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    If enough stockholders agreed to that price, then it wouldn’t matter what the Twitter board or CEO Parag Agrawal thought about the plan. In fact, since Musk also wrote, “I don’t have confidence in management,” Agrawal might expect to find himself out of a job the moment the Tesla founder was successful.

    Twitter has set up its poison pill as a deterrent. If anyone — and here, ‘anyone’ is pronounced Elon Musk — acquires more than 15% of the social media platform, it would trigger the release of a deluge of new shares, some of which might only to be available to current shareholders apart from the bidder.

    The tactic is designed to force would-be corporate raiders to negotiate with the board instead of just buying publicly available stocks. “The Rights Plan does not prevent the Board from engaging with parties or accepting an acquisition proposal if the Board believes that it is in the best interests of Twitter and its shareholders,” Twitter said in a statement. The shareholder rights plan is set to expire on April 14th, 2023.

    Earlier this month Musk finalized a purchase of about 9.2% of the company. That deal briefly made him Twitter’s largest shareholder, though shortly afterwards the Vanguard Group upped its position to a 10.3% stake, putting Musk in second place. Currently, no person or entity owns a controlling stake in Twitter.

    Musk would have had a say in the company’s operating decisions if he had accepted Agrawal’s invitation to join the board last week. However, that job would have required Musk to cap his share in the company at 15%, and earlier this week Musk declined. At the time, Agrawal hinted at a rocky road with Musk, writing, “There were will be distractions ahead, but our goals and priorities remain unchanged.”

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    For his part, Musk has emphasized his belief that Twitter’s algorithm should be open source. He has also suggested that the  platform goes too far in content moderation, though his history suggests he believes in free speech for himself and extreme consequences for others. Besides, Twitter’s moderation policies are loose enough that he’s been able to tweet out a transphobic meme and compare Justin Trudeau to Hitler.

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