Episode 170: Elon Musk & The Poison Pill with Corey Kupfer
I want to talk about something different in this episode. It’s something in the news right now and frankly not a level that we do deals at, but it’s still a deal. This is just more educational in general. What I want to talk about is the Twitter thing that’s everywhere. I’m sure we’ve all heard Twitter is in the news. If you haven’t - Elon Musk of SpaceX and Tesla has already bought off 9% of Twitter stocks, and he’s talking about buying more and potentially taking over the company. The situation between Elon Musk and Twitter is what we call a hostile takeover in the business industry, and as expected, it does not sit well with Twitter’s board.
A hostile takeover was more prevalent in the 80s when we had many corporate raiders. Although hostile takeovers still happen, we’ve heard less about them in recent years because of the poison pill concept. One of the things that inspired me to record this solocast is that the Twitter board adopted a poison pill to prevent Musk or, theoretically, anyone else from taking over the company.
What is a Poison Pill?
A poison pill is a defense strategy used by a target firm – in this case, Twitter – to prevent a potential hostile takeover. For example, in Twitter’s case, the board announced it had approved a shareholder rights plan in the event of an entity or a person acquiring more than a 15% stake in the company without the board’s approval.
Elon owns 9% presently. It will trigger the shareholder rights if he or anyone else hits 15%. If this happens, all the existing shareholders get to buy additional equity at a reduced price, which dilutes the hostile acquirer’s equity. Generally, the poison pill allows existing shareholders to purchase freshly issued shares in a company at a discount, making any possible buyout too expensive for the party planning a hostile takeover. I also shared other examples in this episode, ranging from the poison pill involving Netflix in November 2012 to the one involving the Men’s Warehouse in 2013 and the poison pill involving Papa John’s in July 2018. Check out the episode to sip all the tea!
The Truth Behind The Poison Pill
One of the issues with poison pills is that they could be challenged. The board has a fiduciary duty to do what’s in the best interest of the shareholders, and I’m sure the Twitter board had to do a full discussion on all the reasons why the takeover isn’t beneficial for their shareholders. They would have to conclude that the takeover of Elon Musk would not be better for everybody, even though he was offering a price higher than the company’s stock price.
In theory, if he’s willing to pay that, the stock price will go up, which would benefit the shareholders. They have to work harder to show there are more downsides to the potential acquisition. People, including Musk, could challenge the board’s decision as a breach of their fiduciary duty and try to show that it’s not in the company’s best interest.
There’s something here similar to what we do for clients, called jurisdiction choice. Most of these public companies are from Delaware for good reasons. Delaware statutory law favors the majority owner in these kinds of shareholder derivatives – lawsuits where the shareholders may sue the board for a decision they think is not in the company's best interest.
Lawyers also prefer to maintain operations in Delaware because it has a rich history of over a hundred years and cases in this category. We recommend Delaware to any client trying to own a majority stake because it protects companies, founders, and majority shareholders against those claims.
What does that mean in terms of the poison pill? What it means is that these things are hard to challenge because:
- The companies are likely in Delaware or similar states
- The firms have become more sophisticated in making sure they properly justify these decisions, so it’s hard to meet those standards. Not impossible, but way harder.
How Does This Relate To The Twitter Case?
How this relates to conversations of companies that put the poison pill in place after a triggering event—like Musk getting 9% then trying to take over the company—is that Musk could portray the reaction of the board as a perceived attempt to retain control for their benefit. This could also bring up cases with the board’s past decisions – good or bad.
If this poison pill phenomenon is a part of their original charter or an organic action without the impending threat of a hostile takeover, it would have been easier to argue that they did not take the pill because of Elon Musk and easily say their action is leaning in the best interest of their shareholders. All I can say is, let’s wait and see how Elon Musk and his team respond.
I believe Elon Musk’s team saw that the poison pill might be a problem, and they already have a strategy in place. We are in for an exciting showdown.
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