Twitter Says No to Musk by Taking the Poison Pill as Its Annual Meeting Looms

Fielding questions from many interested persons within the past few days (no one affiliated with Twitter or Musk in any way) served as inspiration to provide a brief synopsis of Elon Musk’s offer to purchase all of the Common Stock of Twitter, Inc., a Delaware corporation, Twitter’s latest response of implementing its poison pill (a/k/a an anti-takeover device) and Twitter's recent history relating to these headlines.

As most have seen, on April 13, 2022, Musk delivered a non-binding proposal to the board of directors of Twitter to acquire 100 percent of Twitter’s Common Stock at price of $54.20 per share. In his offer, Musk announced his intentions to delist Twitter from the New York Stock Exchange and take Twitter private with limited shareholders for the purpose of taking Twitter to the next level. In response on April 15, 2022, by and through its 8-K filing, Twitter announced its implementation of a limited duration shareholder rights plan (the poison pill) that Twitter had prepared for such occasion as disclosed in its last 10-K filing.

In its 8-K filing, Twitter stated that its board adopted the poison pill plan “to protect stockholders from coercive or otherwise unfair takeover tactics” with the overall effect of making Musk’s pursuit of Twitter “more difficult.” In a press release also issued on April 15, 2022, Twitter advised that the poison pill is “intended to enable all shareholders to realize the full value of their investment in Twitter” and to “reduce the likelihood that anyone gains control over Twitter without paying all shareholders an appropriate control premium” or providing Twitter’s board “sufficient time to make informed judgments and take actions that are in the best interests of shareholders.” Both the poison pill and Twitter’s public statements concerning its adoption are standard fare and common practice for publicly-traded companies in similar circumstances.

Twitter’s poison pill plan, formally known as the Preferred Stock Rights Agreement, is a common poison pill plan having two features. It includes a “flip-in” feature allowing all of Twitter’s shareholders (except Musk) to purchase shares of Twitter’s Common Stock at a would-be 50 percent discount of its projected market price upon Musk’s accumulation of 15 percent of Twitter’s outstanding Common Stock which is intended to make Musk’s efforts economically unviable if he moves forward without the consent of Twitter’s board. Upon Musk’s accumulation of 15 percent of the Common Stock, each Twitter stockholder will have the right to buy one additional share of Common Stock for each share of Common Stock owned by the stockholder. The poison pill also includes a “flip-over” feature which protects Twitter from a potential second-step transaction by allowing Twitter’s other stockholders to purchase Musk’s Twitter shares at a would-be 50 percent discount of its projected market value upon Twitter’s consummation of a change of control transaction.

Assuming Musk does not purchase 15 percent of Twitter’s Common Stock without Twitter’s board consent, the poison pill will be short-lived and will expire on April 14, 2023. In the event Musk purchases 15 percent of Twitter’s Common Stock without the consent of Twitter’s board of directors, Twitter has the right to buy back these rights from Twitter’s stockholders equal to $0.001 if the stockholder does not exercise the right.

Twitter’s implementation of its poison pill plan comports with the landmark Delaware Supreme Court case Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) with more-aggressive poison pill plans (suitors acquiring only 5 percent ownership) having survived recent scrutiny in Delaware courts. Under the Unocal analysis, a poison pill is permissive if it satisfies two requirements: (i) whether the Twitter board had reasonable grounds for identifying a threat to its corporate enterprise; and (ii) whether the board’s adoption of its poison pill plan was reasonable in relation to the threat posed. Seemingly, Twitter is on good footing to answer both questions in the affirmative although Delaware has established a low thresh hold to satisfy judicial scrutiny.

Under Unocal, the Twitter board had reasonable grounds for believing that a danger to corporate policy existed because of Musk’s stock ownership. In his April 13, 2022, announcement Musk made an offer to buy all outstanding shares of Twitter’s Common Stock, a change of control transaction which threat to Twitter’s continued corporate existence at least the way that Twitter's current management understands it. In public statements made the same day, Musk stated that Twitter should be taken private. This would result in the buyout of all other stockholders except those approved by Musk which could effect change to corporate policies and values of Twitter through the replacement of the current management of Twitter.

In the analysis of the reasonableness of a poison pill, a board is presumed to have acted reasonable absent self-dealing and personal pecuniary interest and its decisions are materially substantiated when ratified by a majority consisting of independent directors. Polk v. Good, 507 A.3d 531 (Del. 1985). The details of the poison pill convey no interest or right to any member of Twitter’s board specifically and eight of the eleven members of Twitter’s board are independent directors according to its latest Proxy Statement. An independent board’s reliance on the advice of legal and financial experts is prima facie evidence of good faith and reasonable investigation satisfying the second question of the Unocal test. Moran v. Household International, Inc., Del. Supr., 500 A.2d 1346 (Del. 1986). Presumably, Twitter solicited the advice and counsel of relevant experts in relation to its adoption of the poison pill and determination of the exercise price giving Twitter the benefit of the doubt that it’s actions were reasonable.

Musk has made open statements criticizing the management and viewpoint of Twitter. Regardless of whether the board or Musk being the best solution for Twitter is irrelevant. The fact that Musk disagrees with Twitter’s management coupled with his offer to purchase all of the shares of Twitter allows Twitter’s board to implement its poison pill to thwart the offer consistent with Delaware law – no problem.

As of April 18, 2022, Musk has openly suggested that his efforts are not over. He has made open statements that the decision should be put to the stockholders of Twitter which would indicate that Musk may be preparing to make a tender offer directly to the stockholders of Twitter notwithstanding the board’s rejection of Musk’s offer. Section 203 of the Delaware General Corporation Law prohibits Musk from completing a business combination transaction without board approval once Musk accumulates 15 percent of the outstanding Common Stock unless 2/3 of the other stockholders approve of the transaction. Musk may be testing the waters through public statements to discern stockholder interest of his efforts in anticipation of a would be late-stage proxy contest.

Twitter’s annual meeting is scheduled for May 25, 2022, and the latest filing by Arjuana Capital on April 19, 2022, urged the stockholders of Twitter to vote for the additional criteria of at least one independent director having a “high level of human and/or civil rights experience” and also recognized Musk’s battle with Twitter’s management to protect free speech albeit Arjuana Capital’s reference to Musk is almost a footnote. Arjuana Capital’s statement directly blasts Twitter’s current board indicating that its current course subjects Twitter to “enormous legal, financial and reputational risk” although Arjuana Capital’s statement demands an improvement to Twitter’s censorship capabilities rather than permitting open and free speech. Arjuana Capital did not make any stockholder nominations for the Twitter board.

No stockholder nominee is included in Twitter’s Proxy Statement as of April 20, 2022. Interestingly, on February 14, 2022, Twitter amended its Bylaws to limit the time period in which Twitter’s stockholders can add board nominees to Twitter’s proxy statement, a time period between 120 and 150 days prior to the first anniversary of the prior shareholder meeting notice provided by Twitter.  Seemingly, this proxy access bylaw will be applicable to Twitter’s future proxy statements without regard to its 2022 proxy statement since its adoption occurred after the would be time period applicable to the 2022 proxy statement.

As of the date of this article, Musk has not prompted the inclusion of any nominee in Twitter’s proxy statement to replace any director with a new director favorable to Musk’s buyout or removal of the poison pill. A would be 2022 proxy contest could result in a change to Twitter’s board although only incrementally. Each member of Twitter’s board serves a three-year term and the election of the board is staggered so that the majority of the board is not up for reelection in a single year. To be successful in changing the composition of the majority of Twitter’s board, a proxy contest would need to span the period of time needed to gain the staggered replacement of board members opposed to Musk’s offer – and it would need to produce results. At its 2022 Shareholder Meeting, the stockholders of Twitter will vote for three positions on the board and beginning with the start of the 2022 Shareholder Meeting, the total number of board members will be reduced from eleven to ten and only the current members of the board are identified for consideration in Twitter’s proxy statement.

Only time will determine whether it will be more fireworks or a notice of a disposition of shares from Musk. It’s very possible that Musk will continue to update us with announcements having 280 characters or less.