Why can a poison pill dilute away a single shareholder’s stake, but doing some scheme where 51% of the shareholders dilute away the stake of the remaining 49% is illegal?
I'm not going to speak to the legal technicalities, but I can tell you some major differences in the situations.
- The poison pill is aimed at any investor trying to gather control, not a specific one. (At least legally)
- The poison pill is 100% avoidable. It triggers off some future event. This is similar to many other grandfather clauses like building codes, where things are changed going forward.
- 49% bought in thinking they were getting a share and a say in the company. Diluting them away is stealing and fraud (morally, not legally.) So, for instance, would be selling all the companies assets to Company 2 run by the same CEO and board (and who own 100% of Company 2) and letting Company 1 go bankrupt.
The situation is actually identical if Elon were to suddenly tomorrow purchase up to 49%. In that case, it would be the 51% diluting the 49%.
> So, for instance, would be selling all the companies assets to Company 2 run by the same CEO and board (and who own 100% of Company 2) and letting Company 1 go bankrupt.
IANAL, but this is actually theft - Minority shareholders have rights if a company is liquidated, and the courts are smart enough to recognize "Reorganize all assets under a new company owned only by the majority shareholder" as being that liquidation. As far as I'm aware, States Attorney General are the ones to prosecute this crime, so file a complaint there.
I would imagine there is definitely a course of civil action. I honestly don't know (but assume) that criminal action would probably depend on exactly how it was done. After all, Holmes's Theranos trial turned on federal wire fraud charges.
Absolutely - Everything is legal until you're caught. How easy it is to catch you and how easy it is to prove in a court of law are what matters.
As today's Money Stuff[1] opines - This kind of transaction can be really easily made legal, while still giving investors the middle finger. If the company is worth X, you takeover the board and carry out a merger that cashes out minority stakeholders for $1, you're liable for X. If the company is worth X, you takeover the board, and carry out a merger that cashes out minority shareholders for X * .8, you've got a good chance of getting away with it - The standards is "business judgment" vs "fiduciary duty". Companies have fiduciary duty to all shareholders. Sometimes that means that the board gets to dissolve the company for a lot less than it's worth.
It prevents a hostile takeover. It doesn't prevent the company from agreeing to be sold. It theoretically offers protections to negotiate a sale without the buying party having the ability to circumvent that negotiation.
The poison pill (in Twitters case) dilutes any shareholder who acquires more than 15%. (In practice, it's not automatic, but it's what happens). No shareholder currently owns more than 15%. Therefore if anyone doesn't want to trigger this (like Elon Musk) he can avoid dilution by not buying any more shares.
It's there to say "no individual can legally own more than 15% of Twitter" as someone is starting to buy Twitter up. Not say "we're going to explicitly screw Elon Musk after he bought 25% of Twitter."
> Can Elon and three of his "friends" own each 14.9999% of Twitter without triggering the poison pill, so getting to 59.999%?
I'm guessing not: 1) if it were that easy to circumvent, it would be a pointless tactic that wouldn't be bothered with; and 2) I haven't read the actual language, but IIRC some articles that have described it as also including "family members and individuals acting in concert."
A good rule of thumb is: if it took you a short amount of time to think of a "cleaver trick" to defeat something "important," your trick most likely doesn't work. That's either because it fails for reasons you haven't through of or someone already thought of it and countered it.
If he lied when they were setting up the poison pill, Twitter'd probably win the inevitable court case, and he'd get in trouble for misrepresenting his position.
Sure he did. The law recognizes his indirect control as possibility and all the SEC forms specify when they ask how much he controls they're including via those mechanisms.
I mean, if he owned some Google stock, and Google decided to buy 1% of Twitter, that would probably be different, because Elon wouldn't own enough of Google to make them do anything or even be aware of their investments. But if Tesla did, or he bought index funds that included Twitter, then yes.
I understand, thanks. Just wanted to be sure: did he have to necessarily fill out these forms before he said "I control x% of Twitter", or could it be that he didn't have to fill them out, and in practice didn't fill them out?
I think the answer is if Elon can convince Bezos, Gates and Brin that it would be a fun thing to do, they can. If Elon loans you $6 billion to buy 14.9999% of Twitter because you are such good friends it is not something you can do.
For that matter, if Elon promised Bezos, Gates and Brin they would make money on the deal (as opposed to doing it because it would be fun) it would also not be something they could do. Promise is doing a lot of work there.
First, off, this conversation is about triggering the poison pill. So in this case, it would trigger.
That's what the conversation is about.
But since you want to focus on incentives:
That's an immediate dilution of his (and his compatriots) shares until their combined percentage was 15%. Additionally, they can be subject to a shareholder civil suit by anyone who sold the them shares for any increase in value between the time when they sold the shares and the information came to light. Additionally, they can be subject to a shareholder civil suit by any shareholders for any decrease in value of their shares after that information came to light until endtime fuzzy. Additionally, a civil injunction preventing them from taking the company private, preventing their scheme from allowing them to do so and rendering their actions pointless.
Those are just the people who stand to make billions from any of those actions. The SEC can also pursue it's own charges, but since they won't individually make billions, they are less likely to do so.
Update: This is wrong. Ignore it.
The poison pill is not diluting any individual shareholder disproportionately. What it is doing is issuing the right to buy shares at a steep discount. For example, if shares of Company XYZ are currently trading at $50/share, the board would issue all the company's shareholders the right to buy stock at $25/share. Economically, everyone should exercise their rights since this is a good deal. The issue for the hostile bidder is that it can become quite expensive to actually fund the exercise price to maintain their ownership interest. The company now also has more cash and so purchasing all the remaining stock that the hostile bidder does not own will become more expensive/difficult.
The less technical answer is just that "the board runs the company and they can decide how to allocate new shares". This kind of trick is just one of many reasons why hostile takeovers virtually never work. And that's a good thing, precisely because it prevent disruptive attacks on companies competing in the market.
Remember Musk wasn't ever threatening a hostile takeover anyway. He knows it won't work. He was making an offer to the board to induce them to bless the sale. And the board responded with the poison pill, essentially as a way of saying "no". This is the way this kind of negotiation works.
And from the opposite perspective, arguments like "the board isn't performing its fiduciary duty by accepting Musk's offer" are likewise silly. The board is elected by the shareholders (the actual bureaucracy and process for this varies between corporations, I know nothing about Twitter). The level of oversight needed to ensure fiduciary fidelity is already there. No court is going to view a board trying to oppose a hostile takeover as a breach of fiduciary duty, that's ridiculous.
Hm, but in this concrete example Elon is also a shareholder, so he can buy for 25/share, right? And as more shares are being created the spot price on the market should drop, no?
Also, can the shareholders then sue the company (successfully? :)) for decreasing the price? ("everything is securities fraud" after all.)
>Hm, but in this concrete example Elon is also a shareholder, so he can buy for 25/share, right?
Nope. The poison pill allows everyone but the one who triggered the provision to buy shares at a discount. From Twitter's press release:
>In the event that the rights become exercisable due to the triggering ownership threshold being crossed, each right will entitle its holder (other than the person, entity or group triggering the Rights Plan, whose rights will become void and will not be exercisable) to purchase, at the then-current exercise price, additional shares of common stock having a then-current market value of twice the exercise price of the right.
Yes, but presumably enough of the other members with smaller purchasing power will still be each marginally incentivized to buy enough more such that it will dwarf Musk's motivation to outbuy any of them individually. At least that's how I understand it.
Is it illegal for 51% of shareholders to dilute away the stake of the remaining 49%? Serious question -- I don't know.
AFAIK (IANAL), companies have few restrictions on stock dilution as long as the dilution is in the best interest of the shareholders. You can make a legally defensible argument that one actor is bad and should be diluted, but it's probably hard to make a legally defensible argument for selectively diluting shares of idle shareholders.
Yes, this is a self-dealing transaction since it is detrimental to certain shareholders and not others without getting the adversely affected shareholder's consent. This is what Savrin sued Zuck over in the early Facebook days.
Be careful about trying to reason from first principles on stuff like this. Poison pill plans are bog-standard settled corporate law. The legal principle is that the board has the right (/duty) to judge the value of the company, and the courts, in most circumstances, don't second-guess it. The board can (and routinely does) decide that offers to acquire the company must be routed through the board.
Plans like this are why Microsoft doesn't own Yahoo, and why Carl Icahn didn't buy Netflix.
Are they actively attempting a hostile takeover and the board thinks that they'll hurt the company? Then I think that'd be legal. Otherwise I don't see how you could make a legally defensible argument around diluting shareholders just because of their beliefs
They were elected to the board by shareholders. That's entirely different than a hostile takeover. You can't say "this is not in the interest of the shareholders" when the shareholders voted for it
then lets dilute the shareholders who voted for it as theyh are clearly idealogically driven and actively hostile to the company itself or its profitability
Well, I guess if you’re a moral relativist that might be the case. I mean, why not burn the rest of the planet down for temporary profits? Why not enslave children in the Congo? It benefits the shareholders after all. How about murder and torture for hire? These decisions just seem so arbitrary. *shrug*
Why can a poison pill dilute away a single shareholder’s stake, but doing some scheme where 51% of the shareholders dilute away the stake of the remaining 49% is illegal?