On Monday, Twitter filed a dividend distribution for shareholders with the SEC, allowing current shareholders to increase their ownership in the social media platform.
The 8K filing with the SEC gave insight into Twitter’s latest strategy to thwart Elon Musk’s effort to purchase the company.
The filing states, “The Board adopted the Rights Agreement to protect stockholders from coercive or otherwise unfair takeover tactics. 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.”
In the filing, the discounted price of the preferred stock is outlined as “redeemable at the Company’s option for $0.001.” This discount allows the current shareholders to acquire a significant portion of Twitter’s equity for a lower price to maintain control.
The filing gives a “right” to each shareholder that is contingent upon a triggering event. The triggering event is outlined as “an Acquiring Person [who] obtains 15 percent or more of the Common Stock.”
According to the SEC filing, the Rights are active and redeemable until April 14, 2023.
In a filing with the SEC last Thursday, Musk offered to purchase the entirety of Twitter for a premium on the company’s traded values — $54.20 per share.
The action is commonly used as a takeover defense tool to avoid escalating a hostile or unsolicited offer by keeping an investor from accumulating a significant ownership stake.
Shareholder rights plans are one of the most potent and effective defenses against a hostile takeover. By capping ownership, a plan compels a bidder to negotiate directly with the Board of Directors instead of launching an unapproved tender offer or accumulating a controlling stake through open market purchases.
At this point, Musk’s remaining option would be to lobby current shareholders by convincing them to relinquish their shares in a sale directly to him. In most instances, someone like Musk would be forced to utilize a public campaign to compel shareholders to abandon their right to exercise the purchase options made available through the limited plan.
It remains to be seen what next steps Musk will take in his bid to purchase Twitter.