What Will Elon Do Next: a case study in Current Takeover tactics

 

In early April, Elon Musk announced by filing a 13G that he owned 9.2% of Twitter inc (Ticker: TWTR).  On the same day, he accepted a seat on the Board of of Twitter and entered into an Standstill Agreements. Shortly thereafter, on April 9, he terminated the agreement and announced that he would not be joining the Board.

On April 14, Musk announced a proposal to buy the remaining shares of TWTR for $54.20 per share or $43B, a premium of 18% over the closing price of the stock on the day before, but 45% over the unaffected price prior to the announcement of his share stake.

On April 15^th, the Board announced that it would consider Muck’s offer but also announced that it had adopted a poison pill that would, among other things, prevent Musk from acquiring more than 15% of the firm without the Board’s approval. 

Twitter is a Delaware Corporation with a staggered Board of Directors divided into 3 classes with only 2 Directors standing for election in 2022.  Twitter has distributed Notice of its Annual Meeting of shareholders for May 25^th.  Nominations to the Board of Directors are closed (as of Feb 2022)

What will/can Musk do next?

Musk faces some significant obstacles but ultimately should be able to prevail if he is determined to own the company. 

Twitter is a Delaware Corporation.  Delaware is the most popular state for corporate charters in part due to the Delaware Chancery Court which is experienced in resolving issues of corporate law and has a well-developed law governing corporate takeover battles. 

Nominally the two major obstacles facing Musk are the Poison Pill and the fact that Twitter has already filed notice of its annual meeting to elect directors for May 25^th, and other nominations for Director are now closed.

Musk’s options include the following, which could be taken simultaneously or separately:

1.       File suit in Delaware Chancery Court asking that the Pill be redeemed by the Board or be declared invalid. Under Delaware law, the court will apply the standard of “enhanced judicial review” from Unocal.  Unless the Board is prepared to announce an acceptable price as required under the Airgas case, it is likely that Musk will eventually prevail. 

2.       Make a Tender Offer for any or all shares with a 51% minimum condition, although this would have to be subject to redemption of the pill.  To do so, Musk would not have to have procured financing but only a “highly confident” letter from a credible investment bank.

3.       Launch a proxy fight in the election of the two directors standing for election and ask shareholders to cast a NO vote on those directors.  This is unusual since Musk could not nominate his own Directors, but by obtaining a majority of the votes, he would force the Nominees to resign, which is required under Twitter’s Bylaws and market practice.  This would not directly gain control of the firm but would send a strong message to the Board and would most likely decide the battle.

Musk’s best option is #3.  To give his proxy fight more credibility, Musk should take actions designed to reinforce the view that he is fully prepared and able to buy the company either alone or in conjunction with a financing partner.  Given Musk’s personal wealth, management credibility and obvious connections in the financial community, this should be achievable.