What is a 'poison pill' strategy & why has Twitter adopted one?

A poison pill strategy gives existing shareholders the right to purchase additional stock at a significant discount, thus diluting the holdings of a new, hostile investor. It is officially known as a shareholder rights plan.  Twitter’s poison will stay in place for a limited duration of one year. 

The shareholder who triggers the poison pill will be blocked from making these discounted stock purchases.

Twitter’s pill would be triggered if a shareholder acquires more than 15% of the company in a deal not approved by the board.

Twitter said the move aims to enable its investors to “realize the full value of their investment” by reducing the likelihood of any one person gaining control of the company without either paying shareholders an appropriate control premium or giving the board more time.

Twitter’s board is still assessing Musk’s offer. And it would only put it to the company’s shareholders for a vote after approval.

Musk, on his part, had said that his current non-binding $43 billion buyout offer was partly contingent on “completion of anticipated financing”.

Musk currently owns 9.1% of Twitter. If he were to increase his holding to more than 15%, Twitter’s defence strategy will flood the market with new shares that all shareholders except Musk can buy at a discounted price. 

This would instantly dilute Musk’s stake, making the takeover way more expensive.

The strategy also gives Twitter more time to evaluate Musk’s offer and can force him to directly negotiate with its board.

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Twitter emphasised that its poison pill will not prevent the board from “engaging with parties or accepting an acquisition proposal” at a higher price.

Meanwhile, Musk tweeted that if the current Twitter board takes actions contrary to shareholder interests, they would be breaching their fiduciary duty.

Twitter’s action would not bar Musk from taking his offer directly to its shareholders by launching a tender offer.

The poison pill would prevent most Twitter shareholders from selling their shares to him but the tender offer would allow them to register their support or disapproval of Musk’s offer. Such a tender offer does not require board approval.

If Musk gets enough support for his tender offer, he could claim that Twitter is acting against the interest of its investors.
 

Poison pill strategy has been quite effective in checking hostile takeover attempts -- which have reduced considerably since the 1980s when most companies didn’t have the provision in place. 

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