Elon Musk's $43bn Twitter bid: What is a poison pill defence?
Elon Musk is no stranger to sparking unexpected headlines, and last week he stole the limelight once again by offering to buy Twitter (TWTR) for $43.4bn (£33bn).
Shares in the social media platform rocketed on the back of the news, with Musk's offer price of $54.20 per share representing a 38% premium to the closing price on 1 April. This was the last trading day before his 9.2% investment in the company was publicly announced.
Musk said he invested in Twitter as he believes in its “potential to be the platform for free speech around the globe, and I believe free speech is a societal imperative for a functioning democracy.”
He added: “However, since making my investment I now realise the company will neither thrive nor serve this societal imperative in its current form. Twitter needs to be transformed as a private company.
"My offer is my best and final offer and if it is not accepted, I would need to reconsider my position as a shareholder. Twitter has extraordinary potential. I will unlock it.”
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However, since his offer, Twitter’s board of directors adopted a poison pill defence to protect the company from the Tesla (TSLA) and SpaceX chief executive.
The platform said: "The Twitter board of directors will carefully review the proposal to determine the course of action that it believes is in the best interest of the company and all Twitter stockholders.
What is the poison pill defence?
The poison pill is another term for a shareholder rights plan, which allows investors to buy additional shares of the company’s stock at a discount.
This dilutes the value of each individual share amid concerns about an unwanted hostile takeover.
In Twitter’s case, if any shareholder accumulates a 15% stake in the company in a purchase not approved by the board of directors, other shareholders would get the right to buy additional shares at a discount, diluting the 9.2% stake Musk recently acquired.
If set into motion, the poison pill will give shareholders more voting power while severely diluting Musk’s shares in the firm.
Watch: Twitter stock could gain if board 'engages Musk to sweeten bid'
On Monday, the company filed an 8-K form with the US Securities and Exchange Commission detailing a plan that will allow shareholders to be able to pay $210 for one-thousandth of a share of Twitter preferred stock for each share of Twitter common stock they hold.
Each share of preferred stock would confer voting rights, and would be worth double the purchase price, or $420.
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Twitter said the plan would “protect stockholders from coercive or otherwise unfair takeover tactics.”
The firm has not yet formally rejected Musk’s bid, however, reports suggest the board is expected to do so in the coming days.
What can Musk do?
Elon Musk is able to overcome the poison pill defence through a proxy contest. This means he would need to issue a proxy solicitation and receive 51% of the shareholder votes, which can be done by winning over institutional investors.
Although a lengthy process, he would then replace the current board.
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“[Musk] has an army of devoted fans who follow his every move and will be piling into Twitter now – as evidenced by the rise in its share price,” Zoe Stabler, investments writer at the personal finance comparison site, finder.com, said
"Even those who don’t follow him too closely may be tempted to invest in Twitter, without fully realising the potential risks of doing so.
“Our recent research found that half of investors in the UK (51%) are using social media to help inform them when deciding what to invest in, while research we did in 2019 found that 7% of investors bought a company’s stock because they like its ads or spokesperson.”
Musk is one of Twitter’s most popular users, with more than 82 million followers. After criticism to his takeover he tweeted: “Board salary will be $0 if my bid succeeds, so that’s ~$3M/year saved right there."