Elon Musk’s Twitter deal and what it means for shareholders

Money can’t buy you love, the Beatles memorably advised. But can he at least buy you Twitter?

Elon Musk, who according to Forbes is the richest person in the world, reached an agreement with Twitter’s board of directors on Monday to buy all of the social network’s shares for $ 44 billion and convert it into a private company.

Unsurprisingly, buying a publicly traded company is more complicated than buying a loaf of bread or even a house. It’s not just about having the right amount of money, although this is an important prerequisite. It is also about convincing the current owners to take the money.

Musk has won over the directors of Twitter, but the majority of shareholders still have to accept his offer. And then, depending on the terms of the deal and the stake it acquires on the first round, it may have to take more steps to aspire to the rest of Twitter’s shares.

There are also federal laws that must be obeyed. These include the disclosure requirements for prospective buyers and fiduciary obligations for the directors of the target company, whose duty is to the shareholders who elect them.

Here is a look at some of the basics of corporate acquisitions, as explained by experts in securities law and corporate governance.

Become a major shareholder

Publicly traded companies are owned by their shareholders, who are often institutional investors such as pension funds and mutual fund companies. The shareholders elect the directors, who are legally obliged to act in the best interests of the shareholders, even if they do not have to be shareholders themselves. Directors, in turn, hire executives to lead the company and determine its strategy.

Usually an would-be buyer will speak to the company’s top executives before playing a game for a controlling stake; having management support would help win the board, which would make it easier to persuade shareholders to sell. Musk took a different route, quietly becoming Twitter’s largest non-institutional shareholder before briefly negotiating with Twitter management, then announcing his intention to buy the rest of the company’s shares.

So why didn’t he keep buying shares on the QT until he actually owned the company? Because if investors get more than 5% of a company’s voting shares, the federal government requires them to file a form with the US Securities and Exchange Commission within 10 days revealing how much stock in a company they hold, how they paid for the shares and – this is the most important part – whether they intend to take control of the company.

Once this disclosure is made, any “material change” in their holdings – such as the acquisition or sale of at least 1% of the company’s shares – must be disclosed within two days.

The point is not only to protect companies from being taken over in secret, but also to limit the advantage held by those who learned of the would-be buyer’s plans before the news reaches the rest of the market, said attorney David C. Mahaffey, a securities law expert at Sullivan & Worcester. “It is almost impossible to buy a significant stake in a public company without someone knowing,” he said.

The public learned of Musk’s interest in Twitter on April 4, when he unveiled a 13G card in which he claimed to have acquired more than 9% of the company. In fact, the form indicated that he had acquired more than 5% of Twitter’s voting shares by March 14. (Yes, it was over 10 days before the form was submitted and yes, someone sued.)

Disclosure requirements are stricter for shareholders with 10% or more of a company’s stock, and there are additional rules against quick profit taking. According to the SEC, the company can reclaim any profits made by shareholders (or the company’s top executives) if they sell stock within six months of the purchase.

To take control

After Musk’s purchases were disclosed, Twitter quickly reached a deal to give him a seat on the board until 2024 in exchange for keeping his stake below 15%. But on April 13, Musk told the SEC that he was no longer interested in a seat on the board of directors and instead wanted to buy all of the company’s stock and convert it into a private company.

Musk would not need to buy all the shares to be able to impose his will on Twitter. He could have done so by getting a majority of the shares, then using his votes to oust directors and executives who didn’t share his view that Twitter should be “the platform for free speech worldwide,” as he told the SEC. .

But to make the company private, Musk will have to take over the rest of the shareholders, albeit with support from Twitter’s board. If a majority of shareholders vote in favor of the transaction, Mahaffey said it will seal the deal.

Shareholders who don’t like Musk’s offer have a couple of options at this point, Mahaffey said. They can hope that the investors who hold the majority of the shares will vote against the deal, or they can sue in the Delaware Chancery Court to try to block the deal as unfair to the shareholders. And if they vote against the deal just to get it approved, they can assert “valuation rights” and argue that their actions are worth more than Musk’s offer. But in recent experience, Mahaffey said, those claims have not yielded a higher payout than the original offer.

Given the size of the transaction, federal antitrust authorities are likely to look into it. But the SEC won’t: its rules will only require a series of disclosures about the transaction, including whether an outside analyst offered an “fair opinion” on the deal and, if so, what the basis for that opinion was.

Musk told the SEC that Twitter “will not thrive or serve this social imperative [to be a platform for free speech] in its current form, “adding that it” needs to be transformed into a private company. “One benefit of going private: Musk could re-tweet without having to answer to other shareholders, said David F. Larcker, director of the Corporate Governance Research Initiative at the Stanford Graduate School of Business.

“If you go private,” Larcker said, “you can basically do whatever you want.”