Analyzing The Effectiveness Of Poison Pills In Light Of Twitter: Elon Musk Controversy
In October 2022, The Twitter-Musk saga finally came to end when Elon Musk
closed his $44 bn deal to buy the social media service. The acquisition, which
was first announced in April 2022, encountered numerous challenges along the
way. From Elon Musk becoming Twitter's largest shareholder to criticising the
social media site over problems like spam accounts, making an offer to buy
Twitter, threatening to back out of the deal, changing his mind and reviving the
deal before the court-imposed deadline and finally closing the deal, Tesla CEO
finally took control of the twitter.
When initially musk proposed to buyout the company for $43 bn, the company
adopted the defence strategy of "poison pill", to prevent the hostile takeover.
Poison pill allows existing shareholders to purchase freshly issues shares in a
company at a discount to the trading price. It effectively makes any possible
buyout plan extremely costly and prohibitive for the party planning a hostile
As per strategy of Twitter board, the poison pill allowed the other shareholders
to buy more shares at a significant discount if a shareholder purchased 15% of
Twitter's outstanding common stock without the board's consent. The use of
poison pills by the target company is generally viewed as a last-gasp defence
tactic to prevent the acquiring company's attempts at a hostile acquisition of
the target company. In order to prevent a hostile takeover, the target company
manipulates share prices to attain an unfavourable level.
Why poison pills didn't work for TwitterShortly after induction of poison pill, Twitter declared that it has accepted
Musk's proposal to be acquired. As per new deal, each Twitter stakeholder would
receive USD 54.20 in cash, and Twitter would eventually become a privately held
firm upon completion of the full transaction. The price history of Twitter stock
suggests that the company's board may have failed to increase shareholder value.
On the day of its initial public offering in 2013, the stock was trading at USD
44.90, but by after-hours trading in New York, it had risen to USD 50.98 on the
news that negotiations with Elon had started and an announcement was soon to
come. Twitter had not outlined in detail how it would add value over Elon Musk's
buyout offer and had not attracted any rival bidder. Twitter's poison pill
seemed to be little more than an effort to solidify the board, while Elon Musk
promised to make prompt cash payment of $44 bn.
The board ultimately decided to accept Musk's bid due to the increased value of
the deal. The offer was then retracted, and considering the sum of money Musk
was willing to spend on the transaction, the pill would not have been able to
save Twitter. Musk might also potentially defeat the poison pill by holding a
Musk would have to publish a proxy solicitation and get 51% of the shareholder
votes in order to succeed (mostly by winning over institutional investors). From
there, Musk may appoint people favorable to his takeover strategy to replace the
current board. With the defense of poison pill, the target firm would not be
able to defend itself just by relying on its financial resources if the acquirer
has such resources, is ready to pay the high cost of acquisition, and can
directly or indirectly influence the board of the company.
The case surrounding Twitter is unique because most hostile takeovers are
carried out solely for financial gain. Consequently, a greater cost of
acquisition brought on by the poison pill may usually rescue the target business
or atleast turn the deal effectively in its favour.
Legal standpoint in USAEven through headquarter of Twitter is in California, it comes under the
jurisdiction of Deleware, where it was incorporated. As per Business Judgement
rule, unless the plaintiff can demonstrate that the directors have violated
their fiduciary obligations, a court using Delaware law will assume that the
directors have acted in the corporation's and its shareholders' best interests.
A court uses the more complex criteria adopted in Unocal Corp. v. Mesa
Petroleum Co., if it finds that a board has adopted a poison pill to prevent
an unsolicited change in control. Adopting a poison pill will pass this test if
firstly, the board believes that there is a threat to the company's corporate
policies and effectiveness (a reasonableness test) and secondly, proportionate
response to the threat is reflected in the terms of the pill (a proportionality
test). Further, Deleware Supreme Court clarified proportionate response in the
case of Unitrin, Inc. v. American General Corp.
The court ruled that a proportionate response must fall within the range of
reasonable responses to the threat and cannot be preclusive or coercive. In
Third Point LLC v. Ruprechett, Deleware Court of Chancery specifically held that
shareholders' creeping accumulation of control is a reasonable and legally
cognizable threat, which justifies the adoption of poison pills.
Poison Pill: Indian Legal Framework
In India, the Securities and Exchange Board of India (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011 (hereinafter "Takeover Code") subtly
offers protections to make it difficult for an acquirer to pry on the target
company. The Takeover Code mandates that an acquirer make a mandatory open offer
after acquiring 25% of the shares (or voting rights).
Regulation 26 of the Takeover Code expressly prohibits the target company from
making 'any change to the capital structure' after the open offer has been
launched. In other words, under its poison pill strategy, the target business
may not make an offer of unissued shares. However, regulation 26 of the Takeover
Code makes an exemption for the target firm to forgo the restriction if
shareholders' consent is acquired via a special resolution.
The target company is also prohibited from issuing securities with voting rights
during the offer period by regulation 26(2)(c) of the Takeover Code. But Target
Company is allowed to issue shares upon conversion of convertible instruments
that were issued prior to the open offer's public announcement.
By way of this built-in exception, the target company may also issue shares in
connection with a rights issue for which the offer document has already been
submitted to the Registrar or the record date has been established prior to the
open offer announcement. Therefore, despite not explicitly forbidding the poison
pill, the Indian legal system does not make it easy for entities to adopt it.
If the twitter were an Indian Company, the end effect of poison pills would have
been different. Unlike the US context, Indian laws do not allow companies to
issue share warrents in case of a hostile takeover. Further, the share warrants
issued by companies do not enable shareholders to buy shares at a discount to
the prevailing market price on account of restrictions under the Companies Act,
2013 or the SEBI (Issue of Capital and Disclosure Requirements), 2018 and
Foreign Exchange Management Act, 1999 and rules made thereunder.
Many well-known businesses have adopted poison pills to fight hostile takeovers,
including Papa John's , Netflix , JCPenney, and Avis Budget Group. In 2020 after
the pandemic, over 100 tablets were used to protect vulnerable businesses from
hostile takeovers. The effectiveness of this defensive strategy is evidenced by
the fact that no one has ever used a poison pill that was placed to decline an
unsolicited takeover bid. However, there is a drawback.
The performance and value of a firm over the long term may be harmed by these
anti-takeover tactics, which are widely criticised as poor corporate governance
practises. They are viewed as a strategy that prioritises management and board
protection over enticing in offers that might increase shareholder value. In the
case of twitter, the similar allegations were thrown at the company.
While expressing his intentions to buy the company, musk made it clear that his
goal was not solely make profit out of twitter, but to change the working of the
social media platform and remove unnecessary censorious policies. Even the
Twitter founder and former CEO Jack Dorsey criticized the board and suggested to
allow freewheeling discussions on platform. Further, the deal amount was far
more than the substantial value of Twitter even before the adoption of poison
These factors not only made it almost impossible for Twitter's poison pill to
work but also sent wrong message to shareholders. Unless, twitter board could
bring a better bid than musk to the table, it was a long lost battle for
twitter, in which no defence mechanism like poison pill could help.
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