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Comment by mabbo | Hacker News Reader

During a hostile takeover, someone buys 51% of the shares. They then elect a board of people who will approve whatever they want.

Then they can do things like 'merge' the company with some other company they own at a board-approved value-per-share. That value will be much lower than what they paid per share when buying it on the open market, but not so low that the government gets involved. Eg: Musk buys the shares at $50/share, and then 'merges' the company at $25/share, effectively forcing 49% of the shares to be sold at half price. Those shareholders get screwed because they didn't sell their shares during the initial takeover.

Edit: Or, just run the company however they want and share the profits with the other 49%, but ignore their votes, etc.

The Poison Pill says "If a hostile takeover starts, we'll create and sell new shares at a reduced price to existing shareholders- other than the attacker- to prevent the 51% scenario". This is done not to prevent any takeover, but in the interest of the 49% of holdouts who would have been screwed over. It's an effective block against the takeover.

The board represents ALL the shareholders, after all. They don't want to see anyone get screwed.

But now Musk has made a deal that the board has approved. All shareholders get a specific price that is approved. The board wants this to happen, so there's no poison pill.

View on HN

1. How does that look for a random TWTR holder far away from SV? One day his broker just informs him that there are no longer securities on his account, but that account has received some cash?

2. Why is it even allowed (by the government) to decide the share price at the board meeting? These shares don't belong to them, somebody has purchased them already. And these people have decided what the shares are worth, that's kinda the definition of "market price". The board didn't decide that, market did. If they want to get these shares back it sounds only fair that they should have to pay what the new owners consider the fair price, whatever it is.

1: yes. you get cash for your shares. 2: the board is representative of the share holders, like your US Congress person. they have a fiduciary responsibility to give the share holders value. the only reasonable way they could blow up this deal is if twitter had an incredible roadmap with a very good path to matching the value or exceeding the value of Elon's offer. no such roadmap exists, apparently.

2. That doesn't answer my question. Actually, I'm not even sure how it attempted to.

I specifically mentioned the "market price". I don't really know how these US congress persons work, and you may as well imply that the idea that they "represent" you is as much bullshit, as Musk-assigned board member represent real shareholders (and I have no problem with this implication), but there surely must be difference (and it isn't even the fact that you supposedly voted for them): unlike congress people, who can decide whatever they decide in the USA congress, the board cannot decide the market price. At least, usually. Every shareholder wants market price to be higher, and the board members are supposed to try to achieve that, but they cannot appoint the price, they simply have no such power. By definition, it's the market who decides that. Otherwise, it isn't clear, what the "not so low that the government gets involved" is even supposed to be. I fully admit that I don't understand how this works, so this may sound silly, but it would seem fair to me that since the moment company became public, nobody ever can undo that, because microscopic pieces of that company legally belong to some random people now, and they can ask whatever price they want for their share. If anybody makes them sell at any price that's less than what they want — it's a robbery.

Now, I can kind of imagine the way this could be worked around. E.g., there must be some way to liquidate the company, and hence there must be way to execute the merger regardless of what shareholder minority thinks of that. Each company gets supposedly "fair" valuation before the merge and old shareholders get specific amount of "new" shares in exchange to their old shares, which is kinda like getting the cash, so here we go. I mean, I still cannot explain myself, how this can be considered fair and legal, but I suppose there is an explanation. But even this way, the natural way to do that seems to use today's market price. So even if 51% belongs to 1 person and nobody else can decide anything (so, he basically IS the board already), how can this person offer shareholders anything else than the market price for what belongs to them? This doesn't make any sense to me. It sounds like a robbery, plain and simple.

There are stipulations that come with buying shares. In fact when you buy shares, they’re never even actually in your name. They’re like 3 steps removed from you via various holding companies that are basically a bunch of various crap.

One of the stipulations of being a shareholder is that you may be forced to sell your shares under certain circumstances. Nothing illegal about it, even if you don’t like it.

It's interesting to read how a takeover works from a US public markets perspective because the situation is completely different in the UK.

Takeovers of UK-listed companies are subject to the Takeover Code [0] which is administered by an independent body called the Takeover Panel. The Takeover Code is actually a surprisingly readable document which sets out all the rules that the bidder, the target and the shareholders must follow. A "mandatory" takeover in the UK is triggered when a shareholder goes over a 30% shareholding - they are then obliged to make an offer for the stock that they do not own at the highest price they have paid in the previous 12 months.

Shareholders cannot be forced to sell until the bidder has received acceptances of more than 90% of the shares to which the offer relates. The board of the target will offer shareholders an opinion on the takeover price - they can either recommend or reject the offer. Typically, when boards recommend an offer then shareholders will accept but there is certainly no obligation to.

Interestingly, the Takeover Panel used to have no legal enforcement powers (I'm not sure exactly what their status is these days). To ensure compliance with the rules there was a punishment called 'cold-shouldering' - basically if you breached the Takeover Code in an egregious way, the Takeover Panel could instruct market participants to stop dealing with the guilty party. This has only been used in very rare circumstances [1].

[0] https://www.thetakeoverpanel.org.uk/wp-content/uploads/2022/...

[1] https://www.thetakeoverpanel.org.uk/the-code/compliance/cold...

Depends on where you buy. Most folks buy from a broker and are holding the “street name”, which is an abstraction of the actual stock; however, it is possible to directly register shares with the DTC (depository trust company) and actually own them.

It looks like they made a good attempt to answer your question. They are saying that the board's fiduciary duty is what lets them be trusted by the government to sell the company. They are not saying the board decides what a decentralized market would pay each individual shareholder (the stock market does that), but that the board has an obligation to evaluate an offer against the likely future value of the company if it proceeds on its current path. Reading between the lines, the market is essentially a) the current stock price, b) the offer price, c) what the board/SEC/shareholder lawsuit judge thinks is a reasonable difference between A and B.

>If anybody makes them sell at any price that's less than what they want — it's a robbery.

No, this incorrect. Pending a shareholder vote, the board of a company can force you to accept an amount they determine to revoke the validity of your shares. If the value per share (which they decide) of a specific class of shares is not so low as to illicit concern from regulators then it's all above board.

It seems you don't understand the question. I understand that the board can decide value per share. Basically everyone in this thread said this at least once, which is unnecessary, since that's basically what was stated in the root post, and that's why I asked the question in the first place! The question is how this is supposed to be fair. Because, once again, if you make me to sell my property for anything less than I want to sell it for — yes, it totally does sound like a robbery. Again, kinda by definition (I paid money to own some entity; if you want to become the owner of what I own, you have to pay what I ask for it — this is basically how all trading works).

So, once more, my question is: what is the underlying legal idea, that makes this supposedly "fair deal"?

It seems you don’t understand the notion of conditional share ownership. These aren’t bearer bonds or cryptocurrency. Within the corporate structure that allowed you to be issued/sold these shares at the outset are stipulations that the board can liquidate your shares, under certain conditions. Evidently, those conditions have been met. An arbitrary definition of ‘fair’ doesn’t play into it.

I think the question is more to do with how we can have an economic system largely based on shares that can be rug-pulled from under a shareholder at any moment. How come governments don't legislate against it? How come anyone trusts shares enough to buy them?

At a guess I'd say the answers to the two questions are "they do legislate against some behaviours, but blocking hostile takeovers is worse than allowing them" and "the risk of that happening is built into the market price," but I don't actually know.

A healthy control premium over the market price for a publicly traded stock is a bit far and away from being "rugpulled"

Yes, and I think krick was asking what happens when something closer to a rugpull happens.

The SEC says no, or there is a shareholder lawsuit.

Publicly traded securities aren't the Wild West, and the real world has built up comparatively effective dispute resolution tooling like "courts," elected and appointed "judges," "regulators," and "prosecutors."

Not to mention "case law" and "precedence"

I think the problem is that a large number of people got used to various trading accounts like ETrade, Robin Hood, etc. and that seeing "N shares of ABC" on a web site means that they actually own the shares. But this is just an abstraction like someone said in another comment. I would encourage you to go and read any brokerage's terms of service that you agreed to when you signed up. Or if you actually managed to get a paper stock, read the fine print. I promise you it will be very interesting :-)

I personally am aware that shares are a very limited form of ownership and gave my personal answers for why I accept that, but the meta-level question that was raised by krick earlier still stands, which is how everyone else in the world sees it and goes "yep, that's totally fair, we don't need to fix this."

speaking for myself, "fair" means they obey the contract, which gives them that ability

there is also the option of not letting people buy or sell stocks at all, which would resolve the same issues the mandatory sell provisions resolve

>Within the corporate structure that allowed you to be issued/sold these shares at the outset are stipulations that the board can liquidate your shares, under certain conditions.

Those conditions and corporate structures should be regulated way more thoroughly, preventing legal fuckery such as this. Or share classes.

The shareholders appointed the board to act as their fiduciaries in respect to the governance of the company. They voted for them. Among the powers they granted them is the power to accept an offer to buy the company.

If you bought shares after the last annual shareholders' meeting, well... presumably you were happy enough with the current board members and the company bylaws to buy the shares in the first place. You did... do some diligence before you invested, right?

It is not fair nor it is supposed to be. Stocks make as much sense as NFTs.

The board cannot, by itself, decide the value per share. The board can present its opinion that the deal is fair by approving it, and suggest that all shareholders take this course of action by subjecting the deal for shareholder vote. If the majority of shareholders agree by voting in favor, then the company will be sold, even if a significant minority disagrees, because the company is structured to act according to the will of the majority. That's what makes this a "fair deal".

It would be good to get confirmation on this as it contradicts statements upthread saying the board, in USA [though I'd expect it might be specific to a stock market], decided on behalf of the shareholders (to whom they have a duty).

Someone noted the UK position required shareholder assent, which sounds like what you're saying here.

If shareholders vote that sounds 'fair'. If the board decided and shareholders are obliged to go with it as that's how shares are [in some particular jurisdiction/market] then it being fair seems of no concern to that system (as a sibling content intimated).

If you look at (at least one) of the recent articles (try AP or reuters), the board mentioned that the deal is still subject to both shareholder and regulatory approval. That's where it is. Shareholders still have to vote, and the concept of "fairness" will be roughly equal to that of democratic elections. Sometimes the majority votes for a thing and the minority has to accept it in order to make progress.

The board basically voted to stop standing in the way of the deal and submit it to shareholders themselves since they confirmed that A) it seems like an ok deal and B) it's likely to not waste everyone's time.

It's a bit messy. Legally the board has to act in the best interest of all shareholders. In actual trials the judges tend to defer to the board's business judgment since they are intimately involved with the company's strategy and operations, unless the opposing shareholders can provide evidence of equal experience or understanding of business. In practice however, sitting on a company's board is a job, and the directors mostly do what the shareholders want to protect their career and professional image.

In this case, Reuters reported here https://www.reuters.com/technology/exclusive-twitter-set-acc... that the deal is subject to shareholders vote before it can be closed.

Thanks for asking, I had the same question and I thought it was some NYSE agreement I agreed to with Robinhood when I signed up.

> what is the underlying legal idea, that makes this supposedly "fair deal"?

If you don't trust the board to do right by you, you are free to (and should) sell your shares.

> if you make me to sell my property ...

zwily explained above ( https://news.ycombinator.com/item?id=31162992 ) shares are not your property.

> US equities, corporate and municipal bonds can be issued in certificated form, though this practice has been largely replaced due to the costs and inefficiencies of keeping them. Rather holdings are kept as "immobilized" or "street name", with the beneficial owners keeping them in accounts at broker-dealers and banks, just as they do for currencies. DTCC uses a nominee firm, Cede & Co., in whose name a share certificate is held in the DTCC vaults. Each day DTCC reconciles with the relevant transfer agent the number of shares held in its accounts for its member banks and broker-dealers. In turn, other banks and broker-dealers hold accounts with DTCC member firms, creating a chain of ownership down to the beneficial owner.

https://en.wikipedia.org/wiki/Securities_market_participants...

Other people have tried to explain this in many ways, but I'll take a stab in a different direction.

When you purchase stock in a company, you agree to certain governance principles, rights and responsibilities. Those principles outline an individual shareholder's rights in the event of an acquisition.

Basically, you agree to those terms when you purchase the stock. If you don't like your rights, don't purchase the stock. If you own a stock and don't believe the governance structure has your best interests in mind, sell it.

Buyers are often only interested in buying 100% of a company. If an all or none bid comes in, either the people who want to accept or the people who want to reject are going to be unhappy. When setting up a company you have to plan how to deal with this possibility in advance, without knowing the specifics of any offer. Most large public companies come to the conclusion that letting the majority decide is the fairest thing to do, and most shareholders know that's how it works when they are buying the shares.

Imagine the reverse situation, where the board could not decide on the price everyone got per share but did let someone get a controlling stake. I could by 51% of a company for $10 per share and then use my controlling interest to pay myself a consulting fee that was the profits of the company. I could offer the rest of the shareholders $1 for their shares, knowing that I would never let them make any money off of them. When someone takes control you have to try and make sure that at the moment they take control every everyone is paid equally. It doesn't always work like that, but I hope this helps you understand the fairness of setting a price for the remaining shares when someone is in a position to take control of a company.

Tangential, but there was an interesting Lex Fridman podcast recently featuring Michael Saylor, on the advantages of bitcoin as a 'property' as opposed to a 'security' (such as shares).

I mention it here as I hadn't thought about this beforehand, and many examples were given in that podcast of the advantages of property (bitcoin, real estate, barrel of oil) compared to securities (shares). Less potential for conflict of interest, stronger concept of ownership and stability over time.

The board cannot unilaterally decide the share price. The deal will only be finalized once, among other things, it's approved by shareholder vote. But that is largely a formality. The largest shareholders are going to be institutional and not ideological, and $54 is way higher than most (all?) estimations for Twitter's value. Incidentally the same reason that refusing this deal would have exposed the board to personal legal risk.

As for why it's fair - a share doesn't represent ownership of a company, it represents a voting share in an abstract entity. Normally these are pretty close to the same thing, but there are important distinctions - such as here. When Twitter goes private the abstract entity it used to be will cease to exist, along with all voting rights in such.

> what is the underlying legal idea, that makes this supposedly "fair deal"?

Every public company has articles of association which define the rules determining things like this. By purchasing a share you agree to those articles of association. You can’t just say “hold up I didn’t agree to this”, because you did.

The board of directors has a fiduciary duty to represent the shareholders. That also includes the minority shareholders in your scenario. I think the comment above was just making a general statement of what could happen and in that hypothetical scenario, or even if you make it more extreme, say Elon and co acquire 51% of twitter for $50, and install new board with their majority and then the board decides to go private, selling the full company to Elon for $0.01 per share. Could they do this? Technically, I would say yes. But in reality, they would be sued by the 49% of shareholders and the SEC would probably launch an investigation (which is what OP meant by govt would get involved). On the open market, the board doesn't really have much control over the price, but when it comes to complete buy-outs or mergers, they can set a price and as long as most of the shareholders are happy, it is what it is. I'm sure with this Twitter buyout at $54.20, some people are holding shares that they bought at $60+ last year, and they'll be forced to liquidate those and get the payout, so they won't be too happy, but considering the current price of twitter and it's road map it may be a good price.

> It sounds like a robbery, plain and simple.

A lot of work and planning goes into the sale of a company, and there are a _lot_ of safeguards to ensure such a sale isn't done in a way intended to "rob" a large amount of shareholders[0]. You don't really "own" a stock in the regular sense of ownership simply because of the absolute mass of laws and regulations that surround both what you can do with your shares and how much they're worth.

0: https://www.lw.com/thoughtLeadership/the-latham-and-watkins-...

The board could very easily have blown up the deal, which is proceeding only because they've consented to it. The game plan is simple: they do nothing, Musk executes a tender offer (which has a good chance of failing, so there's an out), the board says "nice job, but we're holding out for more money, check in with us next year", Musk launches a proxy fight, but it goes nowhere because Twitter has a staggered board and so there's no chance of a change of control within the next 12 months, 11 months go by, and we look at the price of the stock; if it's up, Twitter's board has de facto won the argument; if it's down, Musk's bid is no longer economically rational. Repeat.

The most boring conclusion here (boringness on message boards usually being a strong proxy for accuracy) is that the board's initial reaction to Musk's offer was reflexive, the same way you'd push back on someone offering to buy your house based on a fixed premium from like Zillow, and that over the ensuing weeks they've managed to do the homework to evaluate the deal, and they've decided Musk is overpaying, so they're taking him up on it.

From everything I've read --- I'm not an expert and someone like 'JumpCrisscross could jump in and correct me --- is that the deal blowing up was essentially the default state, once the shareholder rights plan was put in place.

There’s an alternative explanation to why the board did what they did: Musk has played fast and loose with “I have the funding for this deal” and “I am correctly disclosing my share purchases” in the past. The poison pill was a way to get him to slow down and talk to the board and get his lawyers to sit down with their lawyers and make sure this wasn’t going to be another “I’m taking Tesla private” moment.

(not saying you’re wrong, both or neither of these may be true)

Sure, I'm not unbiased here and am framing this in the way least favorable to Musk --- that if a board is going to accept a first (=chuckle= no, "final") offer from a bidder, it's because the price is more than the board thinks the company is worth. But it's also true that they may have done that calculation quickly, and that really they were just making sure this wasn't an elaborate joke.

Part of my analysis is based on the rumor that Twitter completed a valuation over the weekend, and it wasn't super favorable. But I've got no reliable reporting that establishes that.

Either way, my real point is just that the board could easily have stopped this deal if they wanted to; in fact, they didn't even have to do anything to do stop it.

Musk probably had to overpay, otherwise they wouldn't want to sell it.

Of course. It is standard to pay a premium over the share price in this situation.

We're not talking about the share price, we're talking about the company's projected valuation.

The share price reflects the market's valuation of the company, and shareholders are not going to want to sell for a price less than the current share price plus a premium.

Maybe if the board had information that hadn't been published yet showing that the company's financials had completely tanked since the last earnings report it would be different, but other than that, Twitter's financials are obviously public, and even if the board used something like the DCF method and obtained a number much lower than the market cap, that has absolutely no bearing on whether they would accept a certain price from Musk.

So, no, it's really the share price that matters in this situation.

Also, even if you're purely talking about valuations, there are other common valuation methods like the comparable method that look at what similar companies have received based on their share price, so the idea that the board would decide to sell purely based on cashflow projections is not correct.

No, that's not true. The board's job is to determine how far off the share price is from what they believe the company is worth based on their own internal projections. The board is certainly not expected to take the spot price of Twitter common stock as the ground truth of the company's valuation.

I think that's what GP said/meant, when s/he wrote:

> Maybe if the board had information that hadn't been published yet [...]

Of course the board has information that hasn't been published yet. Every board does.

It sounds, then, like you're agreeing with the post you replied to, which seems to already include the caveat you brought up

Technically they could, but once fiduciary duty is considered, and also given recent drops and maybe less than spectacular q1 results which as I understand are to come soon, they probably decided they shouldn't, as this may expose them to torches and pitchforks from shareholders that are less ideologically driven than they are.

Yes, Musk's bid may be overpaying, but in that case board's duty is to grab the money - and that's probably why he is overpaying.

Sure, we're saying the same thing in that regard.

Pretty much. Your tdameritrade account will just update and stick cash into your account and explain what they did in the cost basis tab.

BTW, this is a taxable event where you might not have expected it to otherwise.

Hadn’t thought of that, this is a great way to force some taxation on billionaires who hold indefinitely!

I wonder if the federal government would ever purchase companies like this…

Wrt 2:

It's a bit complicated. The "market price" isn't really the target here, if you are talking about the price of the stock on stock exchanges. It's accepted that there is a thing called a "control premium" - basically it is more valuable to own >50% of a company because in addition to having an economic stake, you can now control the company. So when you are buying a company, you generally have to pay more (20%+) than the "market price" because you are also purchasing the "control premium".

So, there is a zero sum game going on here. That control premium is going to be divided up between the buyer and the seller based on the strength of their bargaining positions. For various reasons (poison pill included) board has a stronger negotiating position in extracting the "control premium" than do individual investors. If you weaken the current shareholder's bargaining position (by for example not allowing the board to negotiate price) you increase the share of the control premium going to the purchaser and decrease the share going to the current shareholders.

FWIW the poison pill is controversial. But from a "Law and Econ" perspective - this is the main justification.

Also - since I'm on a bit of a roll - there are definitely other stories for what is going on here.

One is that poison pills kind of soften the edges of capitalism a bit by allowing directors to decide if they want to the company to be sold or not. Call it crocodile tears by entrenched management, but there is something to be said for keeping a company off the market if the hostile bidder is going to just fire workers and scrap the company for parts. Fairly, this view is not consistent with "shareholder primacy" but it has to be said that not everyone sees the world that way.

Thanks, that's a bit more of an explanation to what I was wondering about than most of the other answers.

You're welcome. Corporate governance is a surprisingly controversial area for how boring it seems at first glance.

Here's a more in depth apologetic for the interested: https://theliptonarchive.org/1980s/

Corporate governance looks absolutely exciting at first glance, because so much of our lives are determined by it. (We spend a lot more time buying products than we do voting for politicians or filing taxes, same with spending money.)

I had some stock long term in Tiffany. Last year, Tiffany was bought by some outfit, and I received cash for the stock. I found out about it by looking at the statement and wondering where that cash came from :-/

I have some TWTR, and I expect the same thing will happen.

Similar thing happened to me when AMD acquired Xilinx. I got AMD stock and some cash. These types of transactions are usually automated, by an entity like DTCC I would guess.

Didn't XLNX turn into AMD directly at some fixed rate?

The exchange rate was not an integer. If you have to receive a fractional number of shares it’s rounded down and you get a cash payment for the rest.

1/ Yes, and you also potentially incur taxable capitals gains at a time not of your choosing, which can suck.

I have first hand experience of an Australian ASX company being taken private:

In that Instance it was decided by a share holder vote after board negotiations.

Then you get a cheque for the money once it's agreed and gone through.

Happens very quickly with no fuss. All very efficient.

And that's that.

I wonder if the NASDAQ or similar in the US requires a share holder vote?

Your reply merely clarifies that this sale is not a hostile takeover. It doesn’t seem to answer the question, “What caused the board to change the direction 180 and now closing the deal with Musk?”

The pill was put in place to prevent a hostile takeover, not to prevent any sale. Twitter accepting the offer does not constitute a 180.

A week ago, the Twitter board rejected Musk’s offer to buy Twitter for $54.20 a share.

Today, the board accepted Musk’s offer to buy Twitter for $54.20 a share.

What is that if not a 180?

Last week’s offer was a non-binding proposal (from someone with a track record of saying “funding secured” for going private transactions that were not in fact secured). The pill forced Elon to come back with a real offer that disclosed specifics about the financing. It may be the same price but it’s not the same offer as last week.

They never officially rejected it.

The threat of the poison pill was likely just a negotiating tactic.

It is like when an athlete's agent puts out a press release about how the player doesn't feel valued at the current club, etc, etc when they're in the middle of negotiations making it seem like they're very open to jumping ship and stirring up a groundswell of emotions from the fans. But really they're just looking for a bit more in their contract. Deal closes, player signs, the statements are forgotten in a week or two.

We'll probably never know exactly what the points of contention were in the twitter deal.

The thing is though that the price stayed the same. Elon didn't raise his price so their plan backfired? Unless you mean some additional benefits that they get?

It could just be a reflexive "no" until they had time to evaluate. Things that changed since Musk's original surprise announcement are 1) Twitter probably evaluated its future plans and worth, 2) Musk was forced to reveal concrete financing plans to prove it wasn't an offhand joke or a hostile takeover (recall, he bought a lot of shares in secret, which is an alarming sign), and 3) the stock market in general, and probably shareholders, reacted positively, which signals to the board the deal was worth doing.

I think two things happened:

1. Elon Musk proved he was serious by arranging the funding.

2. Elon Musk threatened to sue the board for breach of fiduciary duty — claiming the sale was a good price and shareholders were harmed by not taking it.

And possibly a quiet third:

3. Twitter asked around and no one else was willing to offer a higher price — particularly given the downward trend of markets at present.

I think the board caved when it became clear they’d be personally liable if they refused on purely political grounds.

3a. Saw Netflix, panicked.

3a(1). Know their numbers are going to be crap on Thursday, double panicked

Regarding #2, it isn't so simple for the board, they have large institutional shareholders and sovereign wealth funds, including activist Elliot Management who can sue the board if they think the board is accepting a offer too low. Elliot[1] famously sued the country of Argentina and seized one of their warships when they defaulted on their debt which Elliot owned, they're the ones who pushed for Dorsey's exit, interesting to see if they will take the offer or squeeze Musk

[1]https://qz.com/1001650/hedge-fund-billionaire-paul-singers-r...

Elliot Management had an approximately 9% stake when they went after Dorsey [1], but have since liquidated it and own (if any) a significantly smaller portion. They’re not in the top few investors, anymore. [2]

The Twitter board was sued last year due to their deals with Elliot Management — and may not want to face a second, concurrent lawsuit about breach of duty. [3]

[1] https://www.forbes.com/sites/abrambrown/2021/04/01/jack-dors...

[2] https://www.investopedia.com/articles/insights/060916/top-3-...

[3] https://www.ft.com/content/5f3dd95f-8a7c-4f39-991a-87b2bc056...

Ah I see, then it depends if the other shareholder think the offer is fair or not

Welp billionaires are the new hostile takeover. They can just straight up buy anything they want and skip the 51% vote stuff.

This needs to be prevented in the future. The racist racist at right just bought Twitter because they're tired of being silenced. Users will just go elsewhere, rip Twitter and thanks for making Elon poor, he was getting annoying.

Regardless of the rest, Elon Musk losing a subatantial fraction of $45B won't make him poor.

I just wanted to thank you for this. This is the most succinct and easy-to-understand-for-non-investors explanation of the concept I've seen and now I think I finally understand it.

I learned all of this (and so much more) from Matt Levine's "Money Stuff" newsletter. I cannot recommend it enough.

It wasn't immediately obvious to me how to sign up without buying a subscription, but https://twitter.com/matt_levine/status/994296126055608320?s=... provides a link to do just that.

I've read a few articles here and there but this was the motivation I needed to properly subscribe.

> The board represents ALL the shareholders, after all.

This is the part I don't get. The person who bought 51% of shares is also a shareholder. How come the board can discriminate against a single owner like this, just taking away their shares by force. Could they do it to any existing owner if they wanted?

As I understand, this happens before anyone acquires 51 percent.

Is it possible to acquire up to 51% in atomic move, so there is no fade in that would make poisoning option too late ?

This is the kind of thing the 15% disclosure rule is designed to prevent.

No.

It would require a number of transactions as there is no single other shareholder that owns 51% in this case. So you can do a large number of transactions in a short window, which would cause the price to skyrocket. Additionally, there are disclosure requirements in place once a single shareholder reaches 5%+ ownership. Once the word gets out, everyone else starts buying.

The current board of twitter barely owns any shares.

https://www.barrons.com/amp/articles/how-twitter-board-stock...

The poison pill is to make it so that the person can't ever get 51% because it's not good for everyone else.

The 'short answer' to the question of 'why no poison pill' is simply because the Board reached some kind of agreement with Musk.

I like Musk when he's in his lane, I don't see any good coming from this.

Everyone is nuts to talk about 'shareholders' - who cares? As a 'consumer' - I want a good service and cheap (i.e. free) with no ads. I have zero interest in 'shareholders' of a company I'm not a shareholder in, other than legal protections.

Caring about 'shareholder value' while not a shareholder, is like caring about some rich guys bank account - when often it's a zero sum game.

Every dollar in an investors pocket should be a dollar on your pocket in term of reduced price etc..

So aside from some things he may be able to do t bring the share price up ... I'm wary that much at all will actually benefit Twitter, and he could ruin it.

I don't personally care about it, but it's an important media tool - it's how a lot of information gets out.

> As a 'consumer' - I want a good service and cheap (i.e. free) with no ads.

And I want world peace, people to start using their turn signals, and a pony.

We can want whatever we like. Doesn’t mean the world is going to, or even capable of delivering it.

I agree, but that's besides the point.

There is value on the table, Musk is going to try to take some away, probably in a zero-sum way.

Musk could very well jam Twitter full of ads, making it sheite for us, but more money for him.

Nobody should want that but literally a single person: Elon Musk. Everyone else, who uses Twitter, should be against it.

Why do you think Elon is more likely to make the product worse than the current management?

Twitter can make a lot more money 'right now' by focusing a lot more on ads.

Changing a few features here and there otherwise, will not somehow magically engender a ton more users.

So the 'low hanging fruit' for investors to 'unlock value' is really about ads.

More ads generally makes the product worse for users.

> Everyone is nuts to talk about 'shareholders' - who cares? As a 'consumer' - I want a good service and cheap (i.e. free) with no ads. I have zero interest in 'shareholders' of a company I'm not a shareholder in, other than legal protections.

Shareholders own the company. Which is why people care what they think.

I have preferences for how my neighbors manage and maintain their properties, but since I don’t actually own those properties, my preferences don’t mean a lot.

As a customer of a company, I can decide whether I’m getting my money’s worth. As a general observer I might have an opinion about whether the company makes the world a better place. So shareholders shouldn’t be the only story. But I don’t think it’s strange to focus on what the shareholders think, or for the company’s owners to decide on corporate direction.

My point is a lot of discussion centres around 'creating shareholder value' and 'increasing the stock price'. Many people comment on 'how to do that'.

But it's nuts - why would 'most people' who are likely Twitter 'users' and not 'shareholders' care about someone else's benefit over their own?

Twitter could very well jam up with more ads - as a sure fire way to make more money.

But not I / We are stuck with a crappier product, possibly very crappy i.e. a value transfer from our pockets, to investors.

Shareholders technically 'control' the company, they can do what they want, but what we should want them to do is 'lose money' and give the surpluses to us.

"I want a good service and cheap (i.e. free) with no ads."

I feel this is unrealistic. What other services are good, free and ad-free? Very few. Someone has to pay for the development cost and the upkeep, and that someone will be calling the shots.

I much prefer a "democratic" system where as a customer I pay certain amount of money for using Twitter (say, 5 dollars a month) and get a vote on future changes to a system where I am a free "user / consumer" (and a product at the same time) and some shadowy entity manipulates everything it can to its own non-public purposes.

In order to turn just a little bit more civil, Twitter needs citizens, not users/consumers. And citizens usually have to pay some tax for the system to be sustainable.

They aren't taking away anything, they would be diluting the 51% shareholder's shares. They're giving themselves the option to fend off a hostile take over by making the pool bigger so that no one can get to 51% ownership.

Sure, I accept that it's legal in the US. It just seems strange that there isn't some rule saying that the board has to treat shareholders more or less equally. Since the board is elected by the shareholder votes it seems weird that they can just redistribute voting power at will.

What if there was some minority shareholder that the other owners disliked for some reason, could they force them out too? Or this power is restricted to particular circumstances?

>It just seems strange that there isn't some rule saying that the board has to treat shareholders more or less equally.

AIUI, there is such a rule, and, FWIW, that’s why I found the OP’s explanation[1] somewhat dubious. Deliberately sabotaging the corporation for the benefit of another one that the 51%er owns … seems like the kind of thing that the courts would strike down.

[1] https://news.ycombinator.com/item?id=31160874

Poison pills have been settled law in the US for decades.

Which must be why I didn’t object to that part, only to the (explanation of the legal) justification given. Could you give my comment a re-read and ensure you were replying to the right one?

Seriously, what the heck? I joined in to echo disagreement about a justification given -- one which would (dubiously) imply that you can do whatever the heck you want with the company once you control 51% (like siphoning resources to another company you fully own).

I never disputed poison pills being legal, only one comment's justification for that conclusion.

It's not responsive to simply assert that poison pills are "settled law", since I wasn't ever disputing that, and no clear-headed, good-faith reading of my post would attribute such a remark to me.

And yet ... not only do some of you think the above reply is somehow responsive (or not a strawman), you seem to think I'm wrong to simply point out how it isn't.

Someone want to tell me what's going on? Is there some deep insight I can't seem to fathom from tptacek's non-repsonsive, dismissive reply that makes it all somehow worthwhile?

They are treating them equally. Elon has just as much of a right to purchase those shares at the same price as any other shareholder.

The whole point of the poison pill is that the hostile shareholder is not treated equally. He would not have the opportunity to buy the discounted/newly created shares that would be triggered by him purchasing stock. In essence upon hitting the trigger he would be diluted differently to other stockholders.

Do you have a primary source for that? I don't mean news reports saying that, i mean actual legal documentation saying that's how it works? Because there's a lot of misinformation going around, and a lot of new outlets confusing cause and effect.

Took a bit of digging but I found the SEC filing [1] and the press release [2]. I'll quote from the press release because it is more easily understood. I condensed it a bit but the gist should be clear.

> In general terms, it works by imposing a significant penalty upon any person or group that acquires 15 percent or more of the shares of Common Stock without the approval of the Board.

> the rights will become exercisable if an entity, person or group acquires beneficial ownership of 15% or more... in a transaction not approved by the Board

> each right will entitle its holder (other than the person... triggering the Rights Plan, whose rights will become void...) to purchase.... additional shares of common stock

The SEC filing is a bit dense but then if you scroll down to a bit you get

> entitle the holder thereof to purchase, for the Exercise Price, a number of shares of common stock of the person engaging in the transaction having a then-current market value of twice the Exercise Price.

[1] https://www.sec.gov/Archives/edgar/data/0001418091/000119312... [2] https://www.prnewswire.com/news-releases/twitter-adopts-limi...

>Following the occurrence of an event set forth in preceding paragraph, all Rights that are or, under certain circumstances specified in the Rights Agreement, were beneficially owned by an Acquiring Person or certain of its transferees will be void.

I'm not entirely clear whether this statement in the 8K is legal. Seems to me that it would run afoul of the boards responsibilities, especially given that it is unnecessary to achieve the result.

Elon would not have the right to purchase the discounted shares. Only shareholders other than the one with > 15% can buy the shares for half off (till they hit the open market, of course).

I find it hard to believe that would be the case, since it's needlessly discriminating against a single shareholder. The underlying game theory aspects mean that giving the hostile acquirer the warrants would be essentially irrelevant since they have no benefit in exercising them, while suffering the costs of doing so.

In short, there's no point in preventing elon from being able to purchase additional shares from the company below the acquisition offer because it would just be a waste of money for him.

At the time the poison pill is setup no shareholder has the threshold. If you buy more shares and cross the threshold you did so in full knowledge of the effect.

If the pill were activated and you were diluted out you could sue over the economic harm e.g. that they effectively stole half your position-- and you'd quite possible be reimbursed for the dilution. But you'd be more or less back where you started, minus the mountain paid to lawyers and still without ownership of the company.

Keep in mind, these poison pills aren't really intended to prevent acquisition. They're intended to prevent an inequitable acquisition via takeover where the existing shareholders might have to sue to get a fair treatment. E.g. elon getting enough control that he can pick the board (which takes less than 51% of the shares due to voting power effects)... then the elon controlled board agrees to sell the rest of the company for a less equitable price but not so outrageous that the other shareholders would have an easy time suing over it.

> What if there was some minority shareholder that the other owners disliked for some reason, could they force them out too? Or this power is restricted to particular circumstances?

Diluting out small share holders happens with some regularity in smaller companies. They could sue over it-- but it usually happens when there isn't a lot of value in the company itself and if they failed to push out an old shareholder the company wouldn't continue. So the party being diluted can only really choose between letting it happen or fighting it and getting their fair share of nothing minus legal expenses.

If those who already own stock in the 49% sell, then someone else can buy up to 49% even if the 51% holder never sells.

The amount of ownership can change for one already owning 51% if the amount of stock issued changes - that changes the denominator

Finally: there is proxy voting. Normally common stock holders have 1 vote per share. However most votes are "proxy voted" where you give your vote to someone else because "reasons" - like you can't attend but an institutional investor seems to represent your position so you proxy to that investor.

Via proxy voting, it's possible to push past 51% as a minority shareholder.

Related to this, you can create an informal alliance with an institutional investor owning a larger share in the same company. This appears to be how Musk "borrowed" the money for his takeover - the money came from a large institutional investor that makes money on both ends: interest paid on the loan plus the promise of higher returns on Twitter stock. That's what's called a "can't lose investment" that no ideology can beat.

Of course, the Twitter board famously owns no significant amount of stock which is problematic but reality - this means they have ZERO skin in the game so are more likely to shirk (or risk to shirk) their legal obligations for fiduciary responsibilities. They apparently got a legal wake up call over the weekend about this however.

Shareholders are discriminated against all the time; companies have "preferred" and "common" shareholders. Meanwhile: nobody is actually discriminated against, because it's economically irrational to buy more than the shareholder rights plan trigger; from some light reading, it looks like no poison pill has ever been triggered (the whole point of the poison pill plan is to prevent that from happening).

As far as I know, the only instance of a poison pill being triggered was Versata Enterprises, Inc. in December 2008.

TL;DR: A competitor (Selectica, Inc.)--wishing to purchase Versata--bought over 5% of the shares. The IRS considers this an ownership change, and it imposes a penalty to discourage trading of Net Operating Loss (NOL) carryovers. A poison pill was in place to prevent this tax issue. The board executed the poison pill to dilute Selectica ownership from 6.4% to 3.9%, and that action held up through appeal to the Delaware Supreme Court.

https://www.lw.com/upload/pubcontent/_pdf/pub2563_1.pdf

Do you mean held up or upheld?

the action held up; the court upheld it.

Quite an interesting bit of corporate governance history. Thanks for sharing.

They are not discriminating. Elon can purchase the same amount of stocks (proportionally) at the same price as every other shareholder.

It's just that since the strike price is lower than the price he is offering to buy the company at, other investors are better off exercising their warrants and then selling to elon.

Why do you believe that, against what Twitter board actually said and how other poison pills worked in the past?

> During a hostile takeover, someone buys 51% of the shares. They then elect a board of people who will approve whatever they want.

This is confusing. During the TWTR discussions, one that regularly came out is the importance of a board's fiduciary duty. Buying 51% doesn't let you take the company private, and merging at 50% of the price seems like a monumentally indefensible decision, especially when it is with the 51% holders company. I find it hard to believe you can get away with that.

Management gas extreme leeway to use it's judgement. All they have to do is claim that they will attempt to raise the stock over time price or otherwise make shareholders happier. If many shareholders disagree, they can sue for mismanagement.

This is just flat-out wrong and it's a joke that this is the top comment on a "financially-savvy" forum.

Shares aren't a blockchain, you can't just perform a 51% attack.

Absolutely incorrect, majority controlling stakes and full cash takeovers have different standards and requirements. Majority stakes usually require majority of the minority, which is not 51%.

https://www.lw.com/thoughtLeadership/the-latham-and-watkins-...

> They then elect a board of people who will approve whatever they want.

As others have mentioned, Twitter has a staggered board, meaning not all board members are up for election at the same time. Replacing the board would take years in a hostile takeover.

Patrick Boyle did a great video on this which is slightly less relevant now that the board has accepted the offer but still is a reasonable intro to corporate governance:

https://youtu.be/QXxeyOVpnCU

Sorry but this is utter nonsense.

51% of a company is not some magic ticket that allows you to do basically anything (including screwing the other 49%). It just doesn't work that way. There are certain thresholds that allow you to do more and more things but if you're in control of a company you still have a fiduciary duty to the other shareholders, even small minority shareholders. This is why minority shareholder lawsuits are a thing. This is what makes the entire corporation system work otherwise the 51% would be constantly screwing over the 49%.

Take your example: if you buy 51% of the shares for $50/share and then try and merge at an effective $25/share. Well, that's illegal because you've failed your fiduciary duty to the 49%. You're effectively trying to steal from them.

Also, you can't just acquire 51% of a company. There are rules about that too. There are thresholds here too. IIRC more than 5% and you have to inform the market of taking a large position. More than (IIRC) 10-20% and you have to launch a formal takeover offer. There are rules about how that works too.

You may very well be right. As I said in another reply, I'm mostly quoting a delicious bit of writing Matt Levine published last week.

I suspect that none of what I said is easy or even likely- but I do believe the risk of such things is real and that's why the board set up a poison pill, to ensure they got a real deal and not something more aggressive.

> Sorry but this is utter nonsense.

Can you please make your substantive points without name-calling? There's a site guideline that asks you to do just that.

"When disagreeing, please reply to the argument instead of calling names. 'That is idiotic; 1 + 1 is 2, not 3' can be shortened to '1 + 1 is 2, not 3."

https://news.ycombinator.com/newsguidelines.html

If that guideline is meant to cover the words “utter nonsense” it is not intuitive to anyone

I think the point is that you can strongly disagree with a statement without painting its author as incompetent. Regardless of whether that was the intent, that's certainly how it reads.

Going one step further, you can strongly disagree with a statement without attaching a value judgement to the other person's argument.

In spirit, this rule should hold even if you aren't attacking the author directly but are disparaging the value of their perspective.

That is simply unnecessary and you can just refute the point directly.

I don't see much daylight between "utter nonsense" and "that is idiotic".

I think you are being too harsh on parent.

How is that worse than people literally calling each other's comments bullshit on HN?

Examples: https://news.ycombinator.com/item?id=6805295 https://news.ycombinator.com/item?id=5111959 https://news.ycombinator.com/item?id=6410617 .. and many more

It isn't worse - it's the same thing.

What "name-calling" would that be exactly?

I see "Sorry but this is utter nonsense" as ad hominem, a put down, with overtones of a dismissive "wiser" person dismissing out of hand what is said. That effect of this psychological slight outweighs the fact that they did back up their argument afterwards and didn't leave it as just an unsubstantial comment.

Kind of like a microagression: https://en.wikipedia.org/wiki/Microaggression, I think...

Human language and idioms are hard to create rulesets for. Probably "name-calling" is too specific, but "microagression" may not be understood by all. However it is sad if we need to lawyer the guidelines.

No calling an argument "utter nonsense" doesn't imply anything about the person making the argument. You may think it is ad hominem but technically it simply isn't since it isn't directed to a person but rather their argument.

However, in this context, calling their argument "utter nonsense" is utterly unnecessary and only serves to up the ante.

It isn't just about being personal (though that's particularly bad). It's about not tossing in pejoratives and putdowns. The HN guidelines are clear about this:

"When disagreeing, please reply to the argument instead of calling names. 'That is idiotic; 1 + 1 is 2, not 3' can be shortened to '1 + 1 is 2, not 3."

We don't want name-calling (in this sense) because it leads to dumber, nastier internet discussion.

It's also particularly easy to avoid. If you take out its first sentence, the GP comment loses nothing but hostility and becomes a far better HN contribution.

https://news.ycombinator.com/newsguidelines.html

I think you misunderstood my comment. I agree with the spirit of the rule and hold a similar view to what you explained.

I was pointing out to the commenter that while it was not technically as hominem, it is still not acceptable and doesn’t add anything to the discussion.

Oops, I think I might have replied to the wrong comment. Sorry about that!

Good point (I might be replying to edited version?)

There is no edited version

51% of valid votes is a magic number that allows you to do basically anything (including screwing the other 49%).

This is not true! Stock is not a blockchain!

But doesn't the reduced cost screw all shareholders out of their value?

Besides, when the 51% owner decides to merge at a lower price, can't other shareholders simply refuse to sell?

All this makes it sounds like shareholders have a lot less power than I used to think they had.

The poison pill dilutes everyone’s shares. The hostile actor could / would dump their shares after the hostile take over attempt. That would crash the price.

Alternatively, the board would keep creating shares as the hostile actor attempted to buy more. Keeping the price the same or higher. Eventually the hostile actor would still take the company but at a much higher initial cost. Once purchased they could still do a merger (51%).

At the end of the day it simply forces the hostile actor (in the sense of buying shares) to pay more.

In this case, the board basically had to sell. Else they’d open themselves to lawsuits anyway. If Musk had a failing bid. He’d dump 10% and instantly the price would be down 40-60%, plus people would lose confidence and drop further. Then the board would be open to failing to do their job as representatives of the share holders.

> The poison pill dilutes everyone’s shares.

This is factually incorrect.

The poison pill is specifically designed to dilute the hostile actor's shares, while leaving everyone else mostly untouched (depending on the pill's mechanisms).

> The hostile actor could / would dump their shares after the hostile take over attempt. That would crash the price.

They could, but would they? This would hurt them, too, so it rarely happens. That being said, Musk certainly has enough money and pettiness to lose billions to prove a point, but very few hostile takeover investors have that much money to burn.

> Alternatively, the board would keep creating shares as the hostile actor attempted to buy more. Keeping the price the same or higher.

How would they prevent the market from devaluing the stock as more is printed? This is like govts trying to print more money, it leads to inflation.

> Else they’d open themselves to lawsuits anyway.

If the market thought Twitter had better plans for future profitability, they could be sued for the opposite, going with Musk. They can basically always be sued if enough shareholders think they're not doing a good job.

> He’d dump 10% and instantly the price would be down 40-60%, plus people would lose confidence and drop further.

Putting aside the likelihood hostile takeover investors would waste billions in spite, it seems unlikely that a failed takeover would change the stock price for longer than a news cycle. All the fundamentals are unchanged, so it's more likely the price would return to what it was before.

> How would they prevent the market from devaluing the stock as more is printed?

The important way to think about it is not price-per-share but price-per-percent. The share price on the market likely would fluctuate. It would be diluted as you pointed out, but if the attacker really wanted to own it, they're going to have to be the highest bidder on the market for a majority of the shares. They already have to over-value those shares, since that share that brings them >50% is WAY more valuable to them than every share leading up to it.

If Elon owned 15% and wanted to reach 50%, he has to buy 35% of the shares to reach control (50%). If you double the number of shares of existing shareholders but not Elon, then Elon would own 7.5%. Now he has to buy 42.5% of the company. Assuming the absolute value of the company didn't change, Elon will have had to buy 15%+42.5%=57.5 of the company just to buy what was 50% yesterday. This effectively adds a 7.5% premium to buy a controlling amount, and that premium is divided up among shareholders who sold out post poison pill.

Oh, and along the way, the demand to buy all those shares means that the attacker has to be the highest bidder. And that kind of demand would create a massive shift in the market. If enough of shareholders thought the price was too low, (or realistically a small fraction of them, since companies like index funds managers don't actively trade shares), they wouldn't sell to the attacker and the attack wouldn't be possible - so an attack has a huge upwards pressure on the price. every share gets more expensive than the last.

> it seems unlikely that a failed takeover would change the stock price for longer than a news cycle. All the fundamentals are unchanged, so it's more likely the price would return to what it was before.

Elon is basically a meme, just look at this tweets affect on the markets for things like crypto. Elon being associated with something makes it more valuable. When Elon announced he was getting involved and buying shares, they went up in price double-digit percents. If he said "jk i don't think twitter is valuable" AND dumped a huge load onto the market at once, the price would certainly crater for a while, even if, yes, one day it may return to "normal". But few investors would be happy to stomach that crash, especially since the board is judged in part on share price.

* technically you need >50%, but the math is way rounder and easy to rationalize to use 50 not 51.

* also, I don't know the details about the specific poison pill for twitter, but I'm just picking nice numbers for the math purposes

* this is also a big critique of passively managed funds economically - they limit the market dynamic and force buying/holding of companies that "the market" otherwise doesn't value

Why does the board get to sell my shares?

>Why does the board get to sell my shares?

They don't. The deal has to be approved by shareholders (of stock with voting rights).

Wow, now this is great explanation.

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