On April 14, 2022, Elon Musk made an offer to Twitter Inc. to make it a private company controlled by him and as many persons as a private limited company can have as shareholder thereof.
He offered to pay $54.20 per share in cash. The price was 38 per cent higher than its trading value at the New York Stock Exchange (NYSE) on that day. The value of equity on American Stock Exchange before Musk went public to make Twitter private was $45.81 per share. Musk filed this proposed deal with the US Securities and Exchange Commission.
Musk announced his acquisition of 9% of Twitter shares just days before making the takeover bid. One may wonder what is a takeover and why Musk wishes to achieve it.
Private And Public Company
There are three kinds of companies, primarily, which are used as business vehicle by entrepreneurs in India. They are one-person company, public company or private company (S.3 Companies Act, 2013). Private company has limitations in terms of who can or how many people can become its shareholders, but there is no such restrictions in a public limited company.
Shareholders could be institutional or individual. For example, Musk could have proposed this bid through his company Tesla Inc. which is under his control. However, he decided to take over or acquire Twitter in his individual capacity, which he has signified through an offer to the Twitter’s Board of Directors.
He presently holds 9% shares of Twitter Inc., which makes him biggest individual shareholder. What is interesting is that he wishes to convert a public company into a private company. Musk expressed his willingness to acquire Twitter in his filing before the Security Exchange Commission of the USA, after he went public with his proposal. If he succeeds in his bid, as a Bloomberg report pointed out, Musk would seek to retain as many shareholders as the law for a private company permits.
Two interesting questions here are what is takeover and why Musk has decided to it. Yet another question of interest is can a public company being traded at stock market be converted to a private company?
Law of Corporate Takeover In India
Law of takeover in India is regulated and provided by the Security Exchange Board of India (SEBI) if the company happens to be a listed company, i.e. its shares are being traded at a recognised stock exchange (S.230 Companies Act, 2013). For a non-listed company, such arrangements would be regulated as per the National Company Law Tribunal (NCLT) (S.230 Companies Act, 2013)).
In India, like the USA, it is mandatory for the acquiring person to make a disclosure if that person acquires certain percentages of share listed in the stock exchanges. SEBI (Acquisition of Shares and Takeovers) Regulations 2011 states that in India if any person acquire 25 per cent or more shares or voting rights of a target company, that person is required to make a public disclosure or announcement. If the acquirer fails to do so that, the acquisition of shares or voting rights would have no effect. In other words, acquisitions without public announcement will be null and void, and acquirer would get no controlling rights in the target company.
Since Twitter is a public company, which is listed with NYSE, let us see what laws in India say about it. But before that, we need to know why takeover is made.
A takeover is the process of acquisition of share or voting rights of a target company in order to control it. What control an acquirer looks for? A control is power that acquirer wishes to exercise which may take any of the following forms:
- right to appoint majority of the directors;
- to control the management; or
- to control policy decision
These powers are exercised by the shareholders of the target company, and by taking over these rights by becoming its majority shareholder; the acquirer would get all these powers. Musk has already expressed his concern over Twitter’s policy of banning many views, which Musk thinks is not good for a vibrant society exercising free speech.
He also held an online poll to introduce edit button for the tweets. If Musk wants to change the policy of Twitter, he could only do it by acquiring control over the Twitter. Since he is willing to acquire Twitter and convert it into a private company, he can acquire the power of control, which is required for policy making or taking managerial decision.
Musk wrote in the SEC filing: “As I indicated this weekend, I believe that the company should be private to go through the changes that need to be made. After the past several days of thinking this over, I have decided I want to acquire the company and take it private.”
Is it possible to convert public company into private company in India?
In India, it is possible to convert a public company into a private company. The governing law in this regard is The Companies (Incorporation) Rules, 2018 (the Rules). Rule 41 of the Rules empowers the Ministry of Corporate Affairs to do so. Further, a public company could only be converted into a private company if the Memorandum of the Association of the company allows that. Ss.13,14 and 18 of the Companies Act, 2013 provides for the power to amend Memorandum of Association, Articles of Association and conversion of an already registered company.
Musk has offered to take over Twitter, and turn the public company into a private company in order to "save civilization" and democracy.
Now, that raises a question as to how a private company where policy-making is in the hands of a restricted number of people would be saving democracy. Universal franchise is the very back-bone of democracy whereas restricted franchise is very anti-thesis.
The author is a PhD fellow at Hamburg University. He has written two books on financial laws.
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