Rather than offer up a viable argument for why the offer of $54.20 per share, or a 54% premium over where the stock was trading before Musk started buying shares, was too low and undervalued the stock, the board opted to circle the wagons and adopt a so-called shareholder's rights plan, often referred to as a "poison pill" defense.
If anyone acquires over 15% of the company's stock -- Musk currently owns 9.2% -- Twitter will flood the market with cheap shares to allow other investors to acquire more of the company at a lower price, effectively negating the acquirer's ability to gain control of the company.
While the measure makes it harder for Musk to buy up the company's stock, it also will harm the very stockholders the board purports to protect. This is why poison pills are typically viewed in a negative light, as they help to entrench management at the expense of investors, who see their own holdings diminished along with those of the person trying to buy up the company.
Twitter's bitter pill
Although Twitter's board has not formally rejected Musk's offer, in an SEC filing on Monday, the platform said it adopted the rights agreement to protect shareholders "from coercive or otherwise unfair takeover tactics."
It detailed that a triggering event would impose "a significant penalty upon any person or group that acquires 15 percent or more" of company stock by allowing shareholders to buy Twitter shares at a $210 "exercise price," at which time it will have "a then-current market value of twice the Exercise Price," or $420 per share.
The rights plan is set to expire in one year.
A history of protecting management
Poison pill defenses were first used in the 1980s and were challenged as actually violating shareholder rights, not protecting them, because such plans disenfranchised investors and breached the board's fiduciary responsibility. A Delaware court, however, ruled them legal in 1985, and they've since been used often to thwart hostile takeovers.
The problem is that companies subject to hostile takeovers have often been poorly run and have lost substantial market value. By enacting a poison pill defense, the very leaders who have mismanaged the company protect themselves from being ousted by an acquirer.
Twitter fits the bill. Its initial public offering was priced at $26 a share back in late 2013, and it began trading at just over $45 a share, but a little over eight years later, just before Musk's stock purchase was revealed, the stock price was $39. In contrast, Meta Platforms (META -0.66%), which went public just two years prior at $38 a share, has risen 488% since then.
Fight for ultimate control
Musk has said he would unlock the value that remains within Twitter's stock. Musk has been critical of Twitter's censorious policies and has advocated for allowing more freewheeling discussion on the platform.
That has created consternation within the company and was likely a factor in the board's decision. Musk has gone on to further criticize the board, noting the directors own little stock in the company, so their interests aren't aligned with those of investors. He has vowed that under his leadership all directors will earn $0, a savings of $3 million annually.
Twitter founder and former CEO Jack Dorsey also criticized the board he sits on, tweeting that it has "consistently been the dysfunction of the company." Yet the vote in favor of the poison pill plan was unanimous, meaning Dorsey sided with them against Musk.
A tough pill to swallow
There have been reports of other parties considering making a bid for Twitter, either in concert with Musk or on their own. Meanwhile, the social media platform's investors are prevented from enjoying the fruit of the substantial premium Musk's buyout offered.
And even if they participate in the rights plan and acquire more shares, each will see their holdings become diluted.It's the small investor, not just Musk, who pays a "significant penalty" with this poison pill defense.