(Bloomberg) -- Elon Musk is trying to take control of Twitter Inc., an effort Twitter is resisting. Exactly why Musk, the chief executive officer of Tesla Inc. and the world's richest man, is fighting to buy the social media platform and take it private isn't entirely clear, although he has long chafed at what he sees as excessive limits on expression on the social media platform. Also unclear to many: the blizzard of financial terms being thrown around, with “poison pill” perhaps the most prominent. Here's a guide.
Schedule 13D
The U.S. Securities and Exchange Commission has rules requiring investors who are acquiring large stakes in publicly traded companies to disclose their purchases. People buying more than 5% of a company need to file a form within 10 days of reaching that mark. If they're buying a stake in a company with the intention of pushing for big changes to it -- as what's known as an activist investor -- they need to file a form called Schedule 13D. On April 4, Musk filed a Schedule 13G, a form used by passive investors who aren't looking to shake a company up, showing that he owned 9.1% of Twitter. It said that he'd reached 5% on March 14, meaning that his filing was 11 days late. The next day, he submitted a Schedule 13D, making clear his activist goals.
Hostile takeover
Twitter initially welcomed Musk and said he'd be joining its board of directors. Musk originally agreed to abide by several rules set out by Twitter when he joined the board, including not increasing his stake in the company past 14.9% of shares. For reasons that are still not clear, he changed his mind and declined the seat, and instead announced his intention to buy the company without its approval, in what's known as a hostile takeover. Musk said he would offer to buy Twitter stock at $54.20 a share.
Poison pill
Twitter responded by adopting a defensive strategy developed in the takeover boom of the 1980s -- a poison pill, more formally known as a shareholder rights plan. In most poison pill defenses, a company announces that if an activist investor or opportunistic buyer purchases more than a certain amount of its stock, it will issue new stock and sell it at a discount (or even give it away) to all shareholders except for the person pursuing a takeover. Twitter said in a securities filing that its plan would impose a “significant penalty” on any person or entity that would acquire more than 15% of the company without board approval. “The board adopted the rights agreement to protect stockholders from coercive or otherwise unfair takeover tactics,” according to the filing. Companies often argue that hostile takeovers can be unfair to at least some shareholders because activist investors can lower their offer price once they've reached a level giving effective control. Twitter is using the poison pill defense in order to buy time to come up with a plan that would be in the best interests of its shareholders, including possibly being acquired by other buyers.
Tender offer
On April 16, Musk floated a cryptic tweet with the word “tender,” a likely wink-and-nod reference to a potential tender offer. On April 19, he tweeted a series of blank spaces followed by “is the Night.” That was thought by some to be a reference to the F. Scott Fitzgerald book, “Tender Is the Night.” A tender offer is a structure adopted in both hostile and friendly takeovers in which the buyer asks shareholders to sell their shares at a certain price. In cases where there are no poison pills, acquiring a simple majority of shares will allow the buyer to push ahead with making changes to the company. In the case of Twitter, because it has a poison pill, a tender offer would likely be unsuccessful. But it could also put pressure on the company to sell if shareholders show a willingness to sell their shares.
Proxy contest
In a proxy contest, an investor seeks to make changes at a company through a shareholder vote, including by replacing board members or asking them to support other changes, like rejecting an executive compensation package. Musk missed the deadline to put forth his own candidates for the board in February. But he could simultaneously launch a proxy contest where he would ask other shareholders to withhold their votes for the two directors who will stand for re-election at this year's annual meeting, which is slated for May 25. That would serve as a referendum on his offer, and also allow him to solicit votes for an amendment to the company's charter to declassify the board, meaning that all directors would stand for election each year rather than just a few. Perhaps the most high-profile proxy contest in recent years was when little-known activist Engine No. 1 won three seats on the board of Exxon Mobil Corp. last year.
White knight
Another common tactic by companies defending against a hostile takeover is to pursue a so-called white knight. Those are companies that ride in as rival buyers more favored by the target firm. Their presence often sparks a bidding war that benefits shareholders no matter who wins.
The Reference Shelf
- Bloomberg Opinion columnist Matt Levine looked at Twitter's poison pill defense and Musk's hostile takeover offer.
- A short history of poison pills, a page on white knights and a guide to hostile takeovers from the Corporate Finance Institute.
- Finra's page on hostile takeovers and proxy fights.
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