Twitter’s board of directors has approved a “poison pill” also known as a “limited-duration shareholder rights plan” which would make it more difficult for Elon Musk to acquire the firm.
The “poison pill” provision, announced in a press release last Friday, preserves the right of Twitter shareholders other than Musk to acquire more shares of the company at a relatively inexpensive price, effectively diluting Musk’s stake.
The provision will be triggered if Musk (or any other investor) acquires more than 15% of the company’s shares. Musk currently owns around 9.2% of Twitter’s shares.
- Musk made an offer to acquire Twitter on Thursday, only days after announcing that he would no longer be joining the social media company’s board of directors.
- He made an offer of $54.2 per share of Twitter shares, amounting to over $41 billion.
- On Friday, Twitter’s board of directors made it clear that it will not go quietly, stating that any acquisition of more than 15% of the company’s stock without its consent would result in a plan to flood the market with shares, making a buyout much more difficult.
What is a poison pill?
The approach, known in the financial world as a “poison pill,” simply allows existing shareholders to buy newly issued shares in a firm at a discount to the trading price, effectively making any hostile takeover effort exceedingly costly and prohibitive.
The poison pill, which is a corporate anti-takeover defence mechanism, won’t necessarily stop Musk’s bid in its tracks, but it might increase the cost of buying the company or force Musk to negotiate with the board.
“The Rights Plan will reduce the likelihood that any entity, person or group gains control of Twitter through open market accumulation without paying all shareholders an appropriate control premium or without providing the Board sufficient time to make informed judgments and take actions that are in the best interests of shareholders,” the company said in its statement
What is a poison pill supposed to do?
- Each poison pill has a different set of ingredients, but they’re all meant to allow company boards to flood the market with so many freshly minted shares that a takeover becomes prohibitively expensive.
- When corporate raiders like Carl Icahn – now more commonly referred to as “activist investors” – started stalking publicly traded businesses in the 1980s, the technique gained popularity.
Twitter did not disclose the details of its poison pill on Friday but said it would provide more information in a forthcoming filing with the Securities and Exchange Commission, which the company delayed because public markets were closed on Friday.
You can read up this Nairametrics article which highlights strategies one can adopt to stop a hostile takeover of a company by a rival or an interested group of investors or even fellow shareholders.