Elon Musk’s Twitter Deal and What It Means for Shareholders

Money can’t buy love, the Beatles memorably advised. But can it even buy you Twitter?

Elon Musk, who Forbes ratings as the richest man in the world, reached an agreement on Monday with the Twitter board of directors to buy all shares of the social network for $44 billion and transform it into a private company.

Not surprisingly, buying a public company is harder than buying a loaf of bread. or even a house. It is not only a matter of having the right amount of cash, although this is an important condition. It’s also about convincing the current owners to take the money.

Musk has lured Twitter’s directors over to his side, but a majority of shareholders still have to agree to his proposal. And then, depending on the terms of the deal and how much of a stake he acquires the first time around, he may have to take additional steps to clear his remaining Twitter shares.

There are also federal laws that must be followed. Among them are disclosure requirements for potential buyers and fiduciary bonds for directors of the target company, whose obligations lie with the shareholders who elected them.

Here’s a look at some of the fundamentals of corporate takeovers as explained by experts in securities law and corporate governance.

Become a Major Shareholder

Public companies are owned by their shareholders, who are often institutional investors such as pension funds and mutual fund companies. Shareholders elect directors who are required by law to act in the interests of shareholders, even if they themselves are not required to be shareholders. The directors, in turn, hire executives to run the company and determine its strategy.

Typically, a potential buyer communicates with the top management of the company before playing for a controlling stake; management support would help win over the board of directors, making it easier to persuade shareholders to sell. Musk went the other way, quietly becoming the owner of Twitter. largest non-institutional shareholder before holding brief talks with Twitter management and then announcing its intention to buy the rest of the company’s shares.

So why didn’t he keep buying QT shares until he actually became the owner of the company? Because if investors receive more than 5% of a company’s voting shares, the federal government requires them to submit a form with the US Securities and Exchange Commission within 10 days with disclosure of how many shares of the company they own, how they paid for the shares and, most importantly, whether they plan to seek control of the company.

Once they have made this disclosure, any “material changes” to their assets must be disclosed – such as the acquisition or sale of at least 1% of the company’s shares. during two days.

The point is not only to protect companies from covert takeovers, but also to limit the advantage of those who learned about the plans of a potential buyer before the news reaches the rest of the market, the lawyer said. David S. Mahaffy, securities expert at Sullivan & Worcester. “It’s practically impossible to buy a significant stake in a public company without anyone knowing,” he said.

The public became aware of Musk’s interest in Twitter on April 4 when he filed his application. Schedule 13G reporting that he acquired more than 9% of the company. In fact, the form states that he had purchased over 5% of Twitter’s voting shares by March 14th. (Yes, this is more than 10 days before the form is submitted, and yes, someone sued.)

Disclosure requirements are more stringent for shareholders holding 10% or more of a company’s shares, and there are additional rules against quick profit taking. According to the SEC, a company can take any profits made by shareholders (or the top management of the company) if they sell the shares within six months of buying them.

Taking control

After Musk’s purchases were exposed, Twitter quickly reached an agreement give him a seat on the board of directors until 2024 in exchange for keeping his stake below 15%. But 13 Apr. Musk told the SEC that he is no longer interested in a seat on the board of directors and instead wants to buy all the shares in the company and turn it into a private firm.

Musk wouldn’t need to buy every share to be able to impose his will on Twitter. He could do this by taking a majority share and then using his votes to remove directors and executives who didn’t share his view that Twitter should be “the platform for free speech around the world,” as he told the SEC.

But to take the company private, Musk will have to buy out the rest of the shareholders, albeit with the backing of Twitter’s board. If a majority of the shareholders vote in favor of the deal, that would close the deal, Mahaffy said.

Shareholders who don’t like Musk’s proposal have several options for now, Mahaffy said. They may hope that majority investors will vote against the deal, or they may file a lawsuit in the Delaware Court of Chancery to try to block the deal as unfair to shareholders. And if they vote against the deal only to see it approved, they can assert “valuation rights” and claim their shares are worth more than Musk’s offer. But in recent experience, according to Mahaffy, these claims have not brought in higher payouts than the original offer.

Given the size of the deal, the federal antitrust authorities are likely to look into it. But there will be no SEC – its rules will only require a number of disclosures about the transaction, including whether the external analyst expressed an “opinion on the fairness” of the transaction and, if so, what that opinion was based on.

Musk told the SEC that Twitter “will neither thrive nor serve this social imperative.” [to be a platform for free speech] in its current form,” adding that it “should be converted into a private company.” One benefit of privacy: Musk can remake Twitter without answering to any other shareholders. David F. Larkerdirector of the Corporate Governance Research Initiative at the Stanford Graduate School of Business.

“If you become a private individual,” Larker said, “you can do whatever you want.”