Tesla CEO Elon Musk’s unsolicited bid to buy Twitter (TWTR) for $43 billion, disclosed Thursday, isn’t a traditional takeover offer — so much so, that it may not be a serious or legally binding one.
Securities lawyers say the irregular offer to take Twitter private lacks enough formality to suggest it’s instead a deliberate tactic to elicit a rejection from Twitter’s shareholders, and in turn, create wiggle room for Musk to dispose of his now more valuable shares.
“If I had to guess, I would say that he’s making an unfunded, highly speculative offer, that the board will reject, in order to give himself cover for selling off his stake, now that his board seat gambit has flamed out,” University of Kentucky law professor Alan Kluegel said about Musk’s latest chess move.
“I don't honestly think it has a lot of legal clout,” another law professor, Case Western Reserve University School of Law’s Anat Beck, said.
Since January, Musk amassed a 9.2% stake in Twitter, and over the past two weeks reversed decisions to join the board and to hold his stake as a passive investor. Since Musk disclosed his position April 4, the stock has jumped from $39.31 at the close of trading on April 1 to $45.08 per share at close of trading Friday.
Days after designating himself an active investor, Musk made broad takeover terms in an amended filing with the U.S. Securities and Exchange Commission. For $54.20 per share, an approximate 54% premium over the last day of trading before he started acquiring shares, Musk said in a letter and text message to the company’s board that he would buy all of Twitter’s outstanding common stock.
Kluegel and others question Musk’s intent to buy Twitter, in part because his offer departs from the way that activist investors typically communicate takeover proposals. Normally, they said, an activist investor prepared to buy a company files a SEC Schedule TO, which extends the offer to shareholders.
“If this was an actual, serious attempt at a hostile takeover, there is a formal procedure for making a tender offer, which includes things like a mandatory time period for investors to consider the offer and the board to respond,” Kluegel said.
The Tesla CEO's move to buy Twitter is particularly notable because he's a notorious tweeter. In 2018, Musk and Tesla each agreed to pay $20 million settle the SEC’s claims over his claim via Twitter that he had secured funding to take Tesla private. As part of a consent decree, Musk and Tesla agreed to have Tesla pre-approve tweets potentially containing relevant information about the electric vehicle maker.
In February 2022, Musk and Tesla accused the SEC of illegally using its subpoena power to investigate his and Tesla’s compliance with the agreement, and infringing on his right to speak freely on Twitter. If he does end up buying Twitter, Musk could relax its current policies to allow users to tweet without fewer, or any, restrictions.
“I invested in Twitter as I believe in its potential to be the platform for free speech around the globe, and I believe free speech is a societal imperative for a functioning democracy,” Musk wrote in his latest SEC filing.
Still, there are more reasons to doubt that Musk could end up buying the service. Formal takeover offers, Kluegel said, typically come with a term sheet that details the number of shares the activist intends to purchase, the share price, the investor’s funding source, reasons for the offer, and any contingencies. By law, the filings trigger a 20-day window when the offer must remain open.
Another questionable component of Musk’s proposal, some of the lawyers said, is that Musk characterized it as “non-binding.” Bradley Wyatt, an attorney with Dickinson Wright who specializes in capital markets transactions, said Musk’s approach doesn’t have the hallmarks of an offer that aims to close the deal.
“If he were very, very serious about taking Twitter private, he could start acquiring more shares through a tender offer, as opposed to going through the board,” Wright said. A tender offer involves a bid to purchase a substantial portion of a target company’s securities from its shareholders.
The board, he explains, can be a place to pre-negotiate deal terms, but ultimately it lacks power to sell Twitter.
John Livingstone, a research fellow for Case Western Reserve University School of Law, says there’s also a convincing argument that Musk’s offer is legally deficient in that it doesn’t specify duration or financing terms required by the Williams Act, a federal law that governs takeovers.
“It can’t just be an offer into perpetuity to purchase at $54.20. There's nothing in [Musk’s filing] that indicates when this offer expires,” Livingstone said.
And Livingstone questions the designation of “OO” that Musk uses in his filing to reference his financing source as “other,” a catchall term pointing to a handful of possible sources.
“If it was coming from an affiliate, whether that's an independent LLC, or a trust or something like that, they would list that,” Livingstone said. “This undefined sort of vacuum of where the money's coming from — that's curious to me.”
Still, Musk has time to strengthen his offer, Livingston said. Failing to do so, he said, could signal Musk is positioning to sell his shares.
“He’s pushing all the boundaries,” Beck said, contending that Musk’s advisers know of the offer's deficiencies. “You're talking about very sophisticated parties here.”
The Williams Act aims protect shareholders from false, incomplete, or misleading takeover bids. “This is incomplete. We don't know where the finance is coming from,” Beck said. “I don't care how much you're worth. I want to see where the money is coming from if I'm a shareholder.”
In order to liquidate his Twitter shares while while he remains an active investor, federal law would require Musk to publicly disclose any dispositions exceeding 1% of his Twitter holdings. That could arguably trigger a sell-off that that would drop Twitter's price, resulting in a significant drop in the value of Musk's holdings.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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