14 ms·

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

by mabbo 5y ago

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.

archon 5y ago
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.
- mabbo 5y ago
  I learned all of this (and so much more) from Matt Levine's "Money Stuff" newsletter. I cannot recommend it enough.
  - jsmeaton 5y ago
    It wasn't immediately obvious to me how to sign up without buying a subscription, but https://twitter.com/matt_levine/status/994296126055608320?s=20&t=g5jmka02C4iR43UlJ29LpA 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.
colonwqbang 5y ago
> 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?
- egeozcan 5y ago
  As I understand, this happens before anyone acquires 51 percent.
  - treeman79 5y ago
    The current board of twitter barely owns any shares. https://www.barrons.com/amp/articles/how-twitter-board-stock-ownership-compares-musk-tesla-51650304124 https://www.barrons.com/amp/articles/how-twitter-board-stock...
  - majkinetor 5y ago
    Is it possible to acquire up to 51% in atomic move, so there is no fade in that would make poisoning option too late ?
    - mrkstu 5y ago
      This is the kind of thing the 15% disclosure rule is designed to prevent.
    - tptacek 5y ago
      No.
    - rcoc 5y ago
      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.
hammock 5y ago
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?”
- agency 5y ago
  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.
  - hammock 5y ago
    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?
    - agency 5y ago
      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.
    - zwily 5y ago
      They never officially rejected it.
- lamontcg 5y ago
  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.
krick 5y ago
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.
- aquark 5y ago
  1/ Yes, and you also potentially incur taxable capitals gains at a time not of your choosing, which can suck.
- mylons 5y ago
  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.
  - krick 5y ago
    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.
01100011 5y ago
> 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 https://youtu.be/QXxeyOVpnCU
jmyeet 5y ago
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.
- mabbo 5y ago
  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.
- dang 5y ago
  > 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 https://news.ycombinator.com/newsguidelines.html
  - jmyeet 5y ago
    What "name-calling" would that be exactly?
lettergram 5y ago
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.
- KingMob 5y ago
  > 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.
  - 5y ago
goodluckchuck 5y ago
Why does the board get to sell my shares?
- FPGAhacker 5y ago
  >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).
bpodgursky 5y ago
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.
omegalulw 5y ago
> 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.
- lupire 5y ago
  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.
mcv 5y ago
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.
snake_doc 5y ago
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-take-private-guide-an-overview-of-acquiring-a-us-public-company https://www.lw.com/thoughtLeadership/the-latham-and-watkins-...
_8j50 5y ago
Wow, now this is great explanation.

by mabbo 5y ago

archon 5y ago

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.

mabbo 5y ago
I learned all of this (and so much more) from Matt Levine's "Money Stuff" newsletter. I cannot recommend it enough.
- jsmeaton 5y ago
  It wasn't immediately obvious to me how to sign up without buying a subscription, but https://twitter.com/matt_levine/status/994296126055608320?s=20&t=g5jmka02C4iR43UlJ29LpA 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.

colonwqbang 5y ago

> 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?

egeozcan 5y ago
As I understand, this happens before anyone acquires 51 percent.
- treeman79 5y ago
  The current board of twitter barely owns any shares. https://www.barrons.com/amp/articles/how-twitter-board-stock-ownership-compares-musk-tesla-51650304124 https://www.barrons.com/amp/articles/how-twitter-board-stock...
- majkinetor 5y ago
  Is it possible to acquire up to 51% in atomic move, so there is no fade in that would make poisoning option too late ?
  - mrkstu 5y ago
    This is the kind of thing the 15% disclosure rule is designed to prevent.
  - tptacek 5y ago
    No.
  - rcoc 5y ago
    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.

hammock 5y ago

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?”

agency 5y ago
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.
- hammock 5y ago
  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?
  - agency 5y ago
    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.
  - zwily 5y ago
    They never officially rejected it.
lamontcg 5y ago
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.

krick 5y ago

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.

aquark 5y ago
1/ Yes, and you also potentially incur taxable capitals gains at a time not of your choosing, which can suck.
mylons 5y ago
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.
- krick 5y ago
  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.

01100011 5y ago

> 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 https://youtu.be/QXxeyOVpnCU

jmyeet 5y ago

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.

mabbo 5y ago
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.
dang 5y ago
> 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 https://news.ycombinator.com/newsguidelines.html
- jmyeet 5y ago
  What "name-calling" would that be exactly?

lettergram 5y ago

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.

KingMob 5y ago
> 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.
- 5y ago

goodluckchuck 5y ago

Why does the board get to sell my shares?

FPGAhacker 5y ago
>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).

bpodgursky 5y ago

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.

omegalulw 5y ago

> 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.

lupire 5y ago
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.

mcv 5y ago

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.

snake_doc 5y ago

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-take-private-guide-an-overview-of-acquiring-a-us-public-company https://www.lw.com/thoughtLeadership/the-latham-and-watkins-...

_8j50 5y ago

Wow, now this is great explanation.