EXPLAINED: Twitter Adopts ‘Poison Pill’ To Evade Probable Hostile Takeover By Elon Musk

Shareholder rights plan, or ‘poison pill’ is a defence tactic adopted by target companies where existing shareholders of the target buy additional shares of the company at discounted prices

The board’s rights plan will come into effect if a buyer acquires 15 percent or more stake in Twitter’s outstanding common stock in a transaction not approved by the board | Photo: AFP

New Delhi: In a bid to counter Elon Musk’s hostile takeover of Twitter, the microblogging website’s board unanimously adopted ‘poison pill’ or the shareholder rights plan on Friday, reported news agency AFP. 

The board’s rights plan will come into effect if a buyer acquires 15 percent or more stake in Twitter’s outstanding common stock in a transaction not approved by the board. 

"The Rights Plan will reduce the likelihood that any entity, person or group gains control of Twitter through open market accumulation without paying all shareholders an appropriate control premium," Twitter said in a statement. 

The world’s richest person and CEO of Tesla and SpaceX, Elon Musk on Thursday had announced an unsolicited bid to acquire Twitter stating promotion of freedom of speech on the social media platform calling it his "best and final offer". He took a step further by offering $54.20 a share putting the social media platform’s valuation at around $43 billion, in a filing with the Securities Exchange Commission made public on Thursday.

Last week Musk had disclosed his 9.2 percent ownership stake in Twitter, although he rejected a seat in the company’s board. 

 

What Is A ‘Poison Pill’?

Shareholder rights plan, colloquially known as ‘poison pill’ is a defence tactic adopted by companies who become targets of hostile takeovers where existing shareholders of the target — except the acquirer — buy additional shares of the company at discounted prices to make it less attractive to the acquiring entity. 

As the name suggests, poison pills are a hard-to-swallow decision by the target company’s board as making the company less attractive — by buying shares at discounted price — means dilution of ownership of the company. But, it becomes important for a target company to adopt such a measure to protect the rights of minority shareholders and also from avoiding change of control of company's management. 

There are broadly two types of poison pills — flip-in and flip-over poison pills. When shareholders, except the acquirer, purchase additional shares at discount is a flip-in poison pill. Whereas, when shareholders of a target company buy shares of acquiring company after a hostile takeover becomes successful, thus diluting the ownership of acquirer, is a flip-over poison pill strategy. 

Poison pill also raises cost of acquistion which discourages the acquring company from taking over, although managements also sometimes use it to their advantage to get a higher valuation.

 

Instances Of Poison Pill In Past

Online video streaming platform, Netflix in 2012 had announced a shareholder rights plan, or poison pill just days after investor Carl Icahn had acquired 10 percent stake in the company. The company had announced purchase of two shares at the price of one in case anyone would acquire a stake of 10 percent or more in the company. 

US Fast food chain Papa John’s had also invoked ‘poison pill’ in 2018 against its ousted founder John Schnatter — who owned 30 percent of the company's stock — from gaining control of the company.