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Money can’t buy you love, the Beatles memorably advised. But can it at least buy you Twitter?
Elon Musk, whom Forbes ranks as the world’s richest person, made a surprise offer on April 14 to buy the social network, prompting the company’s board of directors to do the corporate equivalent of emitting a cloud of ink. Since then, other potential suitors have emerged, as well as investment houses eager to play a role in the purchase.
Wednesday could bring a new twist, if only because the date (4/20) matches a number both Musk and Twitter have been using as they’ve jousted. Musk offered to buy Twitter for $54.20 per share; Twitter responded by creating a new class of preferred stock priced at $420.
Not surprisingly, buying a publicly traded company is more complicated than buying a loaf of bread or even a house. It’s not just a matter of having the right amount of cash, although that’s an important prerequisite. It’s also about persuading the current owners (or rather, the people who represent them) to take the money.
There are also federal laws that must be obeyed. Among them are disclosure requirements for would-be buyers and fiduciary obligations for the target company’s directors, whose duty is to the shareholders who elect them.
Here’s a look at some of the basics of corporate takeovers, as explained by experts in securities law and corporate governance.
Becoming a major shareholder
Publicly traded companies are owned by their shareholders, who often are institutional investors such as pension funds and mutual fund companies. The shareholders elect the directors, who are legally bound to act in the shareholders’ best interests — even if they are not required to be shareholders themselves. The directors, in turn, hire the executives to run the company and determine its strategy.
Usually a would-be buyer will talk to top company executives before making a play for a controlling stake; having the support of management would help win over the board, which would make it easier to persuade shareholders to sell. Musk took a different route, quietly becoming Twitter’s largest non-institutional shareholder before negotiating briefly with Twitter’s management, then announcing his intention to buy the rest of the company’s stock.
So why didn’t he just keep buying shares on the QT until he effectively owned the company? Because if investors obtain more than 5% of a company’s voting shares, the federal government requires them to file a form with the U.S. Securities and Exchange Commission within 10 days disclosing how much of a company’s stock they hold, how they paid for the shares and — this is the most important part — whether they plan to seek control of the company.
Once they have made this disclosure, any “material change” made in their holdings — for example, the acquisition or sale of at least 1% of the company’s shares — must be revealed within two days.
The point is not just to protect companies from being taken over in secret, but also to limit the advantage held by those who’ve learned about the would-be buyer’s plans before the news reaches the rest of the market, said attorney David C. Mahaffey, a securities law expert at Sullivan & Worcester. “It’s almost impossible to buy a significant stake in a public company without somebody knowing about it,” he said.
The public learned about Musk’s interest in Twitter on April 4, when he filed a Schedule 13G reporting that he’d acquired more than 9% of the company. In fact, the form indicated that he had acquired more than 5% of Twitter’s voting shares by March 14. (Yes, that’s more than 10 days before the form was filed, and yes, someone has sued.)
The disclosure requirements are more rigorous for shareholders with 10% or more of a company’s shares, and there are additional rules against quick profit-taking. According to the SEC, the company can take back any profits those shareholders (or top company executives) make if they sell shares within six months of buying them.
Taking control
After Musk’s purchases were disclosed, Twitter quickly reached an agreement to give him a seat on the board of directors until 2024 in exchange for him keeping his stake below 15%. But on April 13, Musk told the SEC that he was no longer interested in a board seat, and instead wanted to buy all the company’s shares and convert it into a privately held firm.
Musk wouldn’t have to buy every share to be able to impose his will on Twitter. He could do that by obtaining a majority of the shares, then using his votes to oust the directors and executives who didn’t share his view that Twitter should be “the platform for free speech around the globe,” as he told the SEC.
But to take the company private, Musk would have to buy out the rest of the shareholders. Hostile bidders typically do this by making a “tender offer,” which gives shareholders the option to sell their stakes for a set price by a certain date. Under federal rules, Mahaffey said, a tender offer has to be open for at least 20 business days, and every shareholder has to be offered the same share price.
No one is compelled to accept the offer, however. Some shareholders might hold out and take their chances on a bigger payout later if the buyer acquires less than an overwhelming majority of the shares.
Musk told the SEC that Twitter “will neither thrive nor serve this societal imperative [to be a platform for free speech] in its current form,” adding that it “needs to be transformed as a private company.” One advantage to going private: Musk could remake Twitter without having to answer to any other shareholders, said David F. Larcker, director of the Corporate Governance Research Initiative at Stanford’s Graduate School of Business.
“If you go private,” Larcker said, “you can pretty much do whatever you want.”
Musk has raised the possibility of making a tender offer of $54.20 per share for Twitter, which is almost 40% higher than the company’s share price just before his investment became public (the shares climbed sharply immediately after the news broke but then dropped a bit, suggesting that many investors doubt the deal will happen). At the moment, though, he has merely told Twitter management that he would like to buy the shares for that price.
Takeover defenses
Companies have to tell shareholders what they recommend in response to a tender offer, Mahaffey said. And even though Musk hasn’t made a formal offer yet, Twitter’s board made its opposition clear by adopting a “shareholder rights plan,” also known as a poison pill. If Musk does make a tender offer without the board’s support, or if he buys at least 15% of Twitter’s shares, shareholders will have the right to obtain what amounts to several new shares at half price for each share they own.
The plan would force Musk to buy far more shares of the company in order to gain control, making the takeover prohibitively expensive. And it’s an effective tactic; Peer C. Fiss, the Jill and Frank Fertitta chair of business administration at USC Marshall School of Business, said he knew of no takeover that had successfully overcome a poison pill.
“For these kinds of deals to go through,” Larcker said, “ultimately the board has to approve them. If the board is against your offer, then the only way to get their approval is to replace the board.”
The rules for replacing directors depend on the company’s articles of incorporation and the state where it was incorporated, Mahaffey said. In general, though, the consent of at least a majority of the shareholders is required, and the changes would be adopted at the company’s annual meeting, he said.
Like many publicly traded companies, Twitter’s directors have staggered terms, which makes it more resistant to sudden change. Installing a new majority for its nine-member board through these elections would take two annual meetings and the support of more than half the voting shares. That sort of delay can be lethal for a takeover, Larcker said.
Boards can adopt poison pills without shareholders’ approval, which might make them seem ripe for lawsuits. And the tactic often does draw legal fire, Mahaffey said, but the courts have upheld the ones that are designed to force buyers to negotiate or to protect shareholders against “coercive” offers, rather than to simply prevent any and all takeovers.
In effect, Fiss said, a legal battle over a poison pill boils down to an argument between the board and the buyer over which side has the better strategy for maximizing shareholder value. “The courts have traditionally been reluctant to tell a company specifically which of their strategies was the better one,” he said, adding, “It has to be grossly clear that they [the directors] are not acting in the shareholders’ interests.”
So what happens next?
“The game has started,” Larcker said, “and it’s kind of like Musk’s move now.” Some of the key questions, he said, are “Does [Musk] have the funds, really? Does he want Twitter, really? Is somebody else going to jump in here and buy Twitter? Once these companies are in this position, they kind of go into play.”
Fiss said that companies often try to make corporate raiders go away quietly by paying a premium for the shares they acquired, a practice known as greenmail. But Musk has a policy agenda, Fiss said, not a financial one, adding, “He has a strong political interest in what he wants to do with Twitter.”
One way the fight could be resolved, he said, is that if Twitter adopted the policies that Musk prefers. But that’s highly unlikely, Fiss said, because “Musk is a free-speech fundamentalist.”
Nor did Fiss think that Twitter would be rescued by a corporate “white knight,” a company more sympathetic to Twitter’s current approach. “That more often happens when you have a company that is distressed, that is doing very badly, financially,” and so is worried about being dismantled, Fiss said. “But that’s not the case for Twitter. Twitter is not a distressed company,” he said.
Still, he agreed with Larcker that even if Musk’s bid fails, it could open the door to more buyers — for example, one of the other tech giants. “When a company is actually in play,” Fiss said, “it draws the usual suspects who have enough money.”
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