On April 25, the US social platform Twitter Company announced that it had accepted a $54.20 per share offer from Tesla CEO Elon Musk. Based on that price, Twitter is valued at about $44 billion.
Twitter board chairman Brett Taylor said on the same day that the board made this decision after comprehensive consideration of Musk's proposal, "the proposed transaction will bring a considerable cash premium." The transaction was unanimously approved by Twitter's board of directors, but still requires shareholder and regulatory approval and other customary closing conditions, and the acquisition is expected to close within the year.
The Twitter logo and Musk's Twitter account taken on April 15
On April 14, Musk announced plans to buy all of Twitter's shares in cash. A day later, Twitter passed a time-honored shareholder rights protection plan, the "Poison Pill Plan," under which Musk would be able to buy additional new shares at a discounted price if Musk acquired more than 15 percent of Twitter's shares, diluting Musk's stake and making the acquisition more expensive. However, Twitter also said that if the board believes that it is in the best interests of the company and shareholders, the "poison pill plan" will not prevent the board from contacting related parties or accepting the takeover offer.
What is the Poison Pill Project? What other companies in history have used this program? Why can't it stop Musk?
Text | Chen Siyuan is the Legal Director of CRRC Capital Holdings & Investment Co., Ltd
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Used for nearly 40 years
It is generally believed that the "poison pill plan" was invented by American mergers and acquisitions lawyer Martin Lipton in the 1980s, formally known as "equity dilution anti-takeover measures", and is a defensive measure taken by the board of directors of listed companies to prevent hostile takeovers. Common typical "poison pill plans" mainly include the following three types:
The first is the valgus "poison pill", that is, when the acquirer and the acquired company implement a merger, the shareholders of the acquired company have the right to purchase the shares of the surviving company at a low price.
The second is the inversion type "poison pill", that is, when the acquirer announces a tender offer or its shareholding ratio reaches the "poisoning point", the shareholders of the acquired company other than the acquirer have the right to purchase additional shares of the acquired company at a low price.
The third is the back-end plan "poison pill", that is, when the acquirer announces a tender offer or its shareholding ratio reaches the "poisoning point", the shareholders of the acquired company other than the acquirer have the right to request the acquired company to repurchase shares at a high price.
Although it has been used in the United States for nearly 40 years, the "poison pill project" is still widely controversial. Its proponents believe that through the implementation of the "poison pill plan", the board of directors can use its professional ability and information advantages to avoid harming the long-term interests of the company and all shareholders due to the pursuit of short-term interests by some shareholders, and protect the interests of interested parties such as small and medium-sized shareholders and employees. Even if it ends up selling, it can help shareholders get a higher acquisition premium, help the company fight off the "barbarians", and bring in acquirers that can really help the company's long-term stability.
Opponents argue that directors may blindly implement the "poison pill plan" based only on personal interests (such as reputation, position, etc.), making it possible to become an umbrella for mediocre management and ultimately harm the interests of shareholders and the company. Even if it is eventually sold, directors may not seek a high premium for shareholders, but instead use "poison pills" as a threat in exchange for personal benefits after the acquisition. Moreover, some quantitative studies have shown that the "poison pill program" may have a certain negative impact on the company's stock price.
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Classic case
Since the inception of the Poison Pill Project, there have been many well-known cases involving well-known companies, some of which are the foundational works that shaped its rules and boundaries.
In 1984, the stock price of Household International (hereinafter referred to as Household) was seriously undervalued, and the company's management sensed the risk of hostile acquisition and decided to hire Martin Lipton to develop a "poison pill plan".
This is an valgus "poison pill". The company's board of directors in the form of dividends in the form of dividends in the form of a 1:1 ratio, the distribution of stock subscription rights to ordinary shareholders, when someone for the company's 30% (inclusive) shares issued a takeover offer or hold more than 20% (inclusive) of the company's shares, the above stock subscription rights will be activated, and can be separated from the common shares to transfer and circulate. However, the exercise price is much higher than the share price, in order to prevent shareholders from actually exercising their rights and avoid being identified as fake securities specifically designed to deal with acquisitions.
Thereafter, if Household is eventually merged by the acquirer, the holder of the subscription right is entitled to purchase the shares of the surviving company at half price. As a result, once the holder of the subscription option exercises, the shares of the original shareholders of the acquirer in their own company will be greatly diluted. In addition, the company's board of directors has also set up a low-price redemption mechanism for the above-mentioned subscription rights to release bona fide acquirers.
This "poison pill" has greatly hindered the acquisition intentions of Household's major shareholder, DKM Corporation. John Moran, president of DKM and a director of Household, sued the Delaware Court of Equity to revoke the Pill Program, but lost. As a result, the legal effect of the "poison pill project" was recognized by the court for the first time and was rapidly popularized in the United States.
In 1984, the American forestry company Crown Zellerbach developed an out-of-the-box "poison pill plan" with similar elements to Household's "poison pill", but the stock subscription rights could not be redeemed. Soon, European financial magnate James Goldsmith made an offer to Crown Zellerbach, and after repeated rejections, the two sides briefly went to court. In 1985, Goldsmith changed his strategy by buying Crown Zellerbach shares in the open market and after achieving a shareholding of more than 20%, he publicly announced that he would continue to increase his holdings to more than 50%, but would not eventually merge with Crown Zellerbach.
Since Goldsmith did not seek to merge, which resulted in the holder of the stock subscription right not being able to obtain the right to buy the shares of Goldsmith's company at a low price, the valgus "poison pill" was invalidated, and Goldsmith eventually held more than 50% of the shares and obtained a controlling interest.
A 2005 photograph of unico's headquarters office building in El Segundo, California
This failure directly contributed to the advent of the inverted "poison pill". However, the inversion "poison pill" deprived the acquirer of the right to subscribe for shares on the same terms as other shareholders, and its legality was questionable until the Emergence of the Unico case. In this case, U.S. oil company Unico used a self-acquisition strategy to confront the acquirer, Mesa Petroleum, and although it was not directly related to the "poison pill", the legal rules established in the case were crucial to the implementation of the "poison pill plan".
The case first affirms the legality of the differential treatment between the acquirer and other shareholders of the acquired company because of the resistance to hostile takeovers, clears the legal obstacles for the inversion of the "poison pill", and the other is to put forward specific criteria for judging whether the board of directors has the right to initiate the "poison pill plan": the board of directors should prove that it released the "poison pill" not to retain personal positions, but based on reasonable reasons to believe that the acquisition will bring a real threat to the company's operations, in addition, the "poison effect" is comparable to the degree of threat.
In 1985, in response to the acquisition initiated by Andrews and Forbes Holdings (M&F), the board of directors of The American Company decided to implement a self-acquisition plan and release the back-end plan "poison pill". Accordingly, the Board of Directors distributes a rights plan to common shareholders in the form of a dividend, which will be activated when anyone holds more than 20% (inclusive) of The Shares of Revlon, and the rights plan holders have the right to require the Company to convert their common shares into a one-year bond with a face value of $65 (well above the purchase price per share proposed by M&F Corporation) at a coupon rate of 12%. Since then, M&F has continued to raise its offers, and Revlon has brought in other acquirers to confront it. Eventually, M&F sued in the Delaware Court of Equity.
The court's decision established the famous Revlon rule that when a company is unavoidable (e.g., if the board actively seeks to sell, restructure, or attempt to sell the company to a third party in the face of a hostile takeover), the board should seek the highest sale price for the company with the goal of maximizing the interests of shareholders, and must not blindly implement anti-takeover measures such as the "poison pill plan".
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Possible causes of failure
According to the information currently released to the public, there are two possible reasons why Twitter's board of directors eventually abandoned the "poison pill plan".
First, its feasibility is questionable, and Twitter's "poison pill plan" may not meet Unico's standards.
Musk did not adopt the two-phase tender offer strategy commonly used in hostile takeovers, in which the first phase was to buy at a high price until a controlling stake was obtained, and the second phase was to acquire the remaining shares at a low price. This strategy is often seen as a typical tactic of hostile takeovers, placing shareholders in a "prisoner's dilemma", forcing shareholders to know that the two-stage comprehensive offer is not favorable, but dare not easily miss the first phase of the acquisition.
Musk
Musk's past behavior, his "ambitions" to reinvent Twitter, and the fact that a $46.5 billion fundraising plan has been implemented make it difficult to link him to the "barbarians" who have committed "green mail blackmail" (that is, the acquisition is fake, in order to blackmail the company into buying back shares at a high price), or who intend to dismember the company after the acquisition and then monetize the company, and more people may think that Musk will bring a brighter future for Twitter.
Musk's $46.5 billion funding plan includes: raising $13 billion from financial institutions such as Morgan Stanley, Bank of America and Barclays as collateral for acquired Twitter shares; a $12.5 billion loan secured by Tesla shares in Musk's hands; and borrowing about $21 billion in Musk's remaining shares, which could mean he's going to sell Tesla or reduce his stake in unlisted companies, such as Space Exploration Technologies.
Therefore, Twitter's board of directors may not be able to prove that Musk's acquisition plan is coercive and will pose a real threat to the company's operations, so the "poison pill plan" may face the risk of being revoked because it does not meet Unico's standards.
Second, the necessity is questionable, that is, the implementation of the "poison pill plan" may no longer serve the interests of all parties.
Musk's offer is not stingy, with a $54.20 per share quoted about 38 percent more than the closing price of Twitter's stock on April 1, the trading day before Musk's shareholding was disclosed. As Twitter said in a press release, it is in the interest of all shareholders to choose to accept Musk's acquisition plan.
In addition, it is reasonable to guess that Musk's acquisition plan should protect the interests of stakeholders such as Twitter employees, and may even have commitments to current board members. In short, all parties may think that implementing the "poison pill plan" is no longer necessary for Twitter.