Jack Dorsey and former SEC chairman criticize Twitter's board for poor handling of Elon Musk's offer

Patrick Pleul/Pool via AP

Twitter’s board has adopted what’s known as a “poison pill” strategy to deal with a potential takeover by Elon Musk. As Jazz pointed out over the weekend, the details of the plan are somewhat sketchy, but if Musk attempts to purchase more than 15% of the company’s shares, the plan would essentially flood the market with new shares making it harder for him to buy them all. Quarz has a piece about what this would mean:

The poison pill plan is a serious deterrent against a hostile takeover, says Adam Pritchard, a corporate and securities law professor at the University of Michigan Law School. Not only would the $2.64 billion Musk already spent be squandered by the move, Musk would have to spend many billions more than the $43 billion he already proposed spending.

“It’s economic suicide,” he said in an interview. “No one has ever triggered a poison pill. They’ve been around since the 1980s. No one has ever triggered one.”

The Associated Press points out that this is effectively a plan to blow up the company if Musk tries to take it over:

The poison pill defense essentially would spell the end of Twitter if Musk or another investor acquires 15% or more of the company, said James Cox, a professor of corporate and securities law at Duke University.

Shareholders who exercise the rights and buy preferred stock at $210 would get $420 in Twitter stock or assets, he said. That would be more than Twitter can afford to pay, and likely would send the company into receivership, Cox said.

“You want to create an event that Musk would never want to trigger because it would be the death of Twitter,” Cox said. He predicts that Musk and the board will negotiate, at least for a while, adding that no investor has ever crossed the line to activate a poison pill.

Musk said his offer of $54.20 per share was a last and final offer but maybe this is an attempt by the board to negotiate something better? Or maybe the board members just don’t care about the shareholders. Saturday, outgoing board member and Twitter co-founder Jack Dorsey criticized the board in a couple of tweets, one of which suggested they were dysfunctional.

Again, Dorsey is expected to leave the board next month so the other members may not care much about his opinion. Elon Musk was quick to point out that with Dorsey’s departure the remaining board members own almost no stock in the company.

Musk also got some support from former SEC chairman Harvey Pitt. Pitt gave the board an “F” grade for their handling of Musk’s buyout offer.

“I would give Twitter’s board an F,” Pitt said on Yahoo Finance Live. “I believe under the circumstances, they needed to check out whether this was a real bid. If it were a real bid, then they needed to do what was in the best interest of their shareholders. This is a price that hadn’t been seen in quite some time. The number is at least a legitimate frame of reference and the board’s unwillingness to treat it seriously strikes me as worthy of a poor grade.”

So what happens next? There are at least four options. First, Musk could decide to back off and sell off his 9% stake in the company. Secondly, he and the board could decide to negotiate for a slightly higher price. Third, he could buy up more stock and trigger the poison pill, which would be a disaster for Twitter and would not achieve Musk’s stated goal of making Twitter an open forum for free speech.

Finally, he could make what’s called a “Tender offer” which is basically an appeal directly to shareholders that they sell the stock at a given price. If he can get some larger shareholders on his side, that would put additional pressure on the board to compromise rather than blow up the company with a poison pill. That’s what this tweet was about:

And then there’s the possibility that another party will make an offer for Twitter. That, presumably higher, offer could either be accepted or used as leverage to get Musk to up his own offer.