Hostile Takeovers, Poison Pills, and Free Speech: Can Elon Musk Transform Twitter to the Global Platform for Free Speech?
Tesla and SpaceX CEO Elon Musk has constantly criticized Twitter for its free-speech restrictions and has even emphasized thoughts of creating a new platform. Twitter has faced controversy in the past for censoring figures, such as former president Donald Trump, over claims of spreading misinformation. Twitter moderates content by taking down posts, placing warning labels on posts, and muting or suspending accounts. Elon Musk holds an “absolutist” view on free speech and seeks to eliminate this proclaimed undermining of free speech by Twitter, which Musk claims has undermined democracy.
In early April 2022, shortly after making several criticisms, Musk acquired a massive 9.1% ownership stake in Twitter, making him the second-largest shareholder of the company. He acquired this stake with the hopes of making Twitter the global platform for free speech. Musk was later invited to join Twitter’s board, which would limit him from acquiring more than 15% ownership, but he denied the offer. Musk claimed in an SEC filing that “the company will neither thrive nor serve this societal imperative in its current form… Twitter needs to be transformed as a private company.”
After making this statement, Musk made an extremely controversial offer to buy all of Twitter and take it private at a price of $52.40 a share, valuing the company at $43 billion. This move raised several questions regarding the legality of Musk’s offer and attempted takeover, his motivations behind doing so, as well as interesting legal defense moves made by the Twitter board in response.
Securities attorneys have claimed that Musk’s buyout offer may not have enough legal merit to constitute a legitimate offer. They suggest that the informality of this offer might be “a deliberate tactic to elicit a rejection from Twitter’s shareholders,” in order for him to sell off his more valuable newly acquired shares. This opinion stems from the fact that Elon Musk disregarded formal procedure for a hostile takeover by not filing an SEC Schedule TO and including a mandatory time period for investors to consider the offer and board members to respond. University of Kentucky law professor Alan Kluegel states that “formal takeover offers come with a term sheet that details the number of shares the activist intends to purchase, the share price, the investor’s funding source, reasons for the offer, and any contingencies.” Musk simply offers in perpetuity to buy the shares at $54.20 without disclosing a timeline and importantly how he would finance such a transaction which is required under the Williams Act, the federal law that governs takeovers. Musk is reportedly working with Morgan Stanley on possibly working out the financing, but it would require a serious amount of leverage on the volatile Tesla stock which many banks may be unwilling to offer. The legal deficits in Musk’s offer may be in violation of William's Act and could be indicative of an ulterior motive that has nothing to do with free speech.
Twitter’s board has not taken this takeover attempt lightly. In response to Musk’s offer, the Twitter board responded by adopting a “poison pill” plan. The poison pill plan, also known as a shareholder rights plan, is a defense tactic invented by WLRK lawyer Martin Lipton that is designed to discourage and prevent attempts of a hostile takeover by an acquirer. The plan essentially makes itself seem unfavorable to the acquirer by diluting its own shares, making it substantially more difficult and expensive for the acquirer to achieve complete ownership. Under Twitter’s one-year poison pill plan, "if any person or group acquires beneficial ownership of at least 15 percent of Twitter's outstanding common stock without the board's approval, other shareholders will be allowed to purchase additional shares at a discount." This plan is known as a Flip-in Poison Pill. While this may be successful in deterring Musk from completing this takeover, depending on his seriousness, it does come with consequences. This defense discourages institutional investors from buying in and dilutes the company's stock value which could have major financial consequences.
Ultimately, Elon Musk’s hostile takeover as it stands right now is on shaky legal grounds. The offer is currently very broad and is neglecting a timeline and the major question of how he will finance the $43 billion needed to complete this buyout. While this may be in current violation of the William’s Act it is important to note that this story is still developing, and Musk still has time to revise his offer and cover these holes if he is indeed serious about this takeover. If Musk does not revise his offer, it may be indicative that his intent behind all of this was never to buy Twitter, but rather to exit his newly acquired shares with strong reason in the public eye. At the center of all this is the question of free speech. It is difficult to see how, if Musk does complete this takeover, he would revise Twitter’s censorship platform. Twitter has struggled for years to find the right balance between moderation and free speech and regardless of whether or not Musk is successful, this may be the catalyst for change free-speech activists have been waiting for.