A Poison Pill

April 19, 2022 Updated: April 19, 2022

Commentary

The poison pill has been in the news of late. No, this has nothing to do with strychnine or any other such way of killing people. It rather concerns Elon Musk’s desire to purchase Twitter outright (he already owns something like a 9 percent share of this company). Why does he want to buy Twitter? Why doesn’t he stick to cars and spaceships, his usual concerns? He has this weird idea that this web should be open to all shades of opinion, should not continue to be a wholly owned subsidiary of the socialist, woke, politically correct movement.

But the powers that be at Twitter are having none of this. They enjoy the status quo, which is pretty much limited to views congruent with those of the so-called “progressive” left. They have employed the poison pill strategy to counter what they consider Musk’s attempted “hostile takeover” of their company.

First of all, let it be said, loud and clear, there’s no such thing as “hostile takeover,” at least not in the marketplace. That institution is limited to purely voluntary interactions. Yes, there are “hostile takeovers” out there, but these are limited to car-jacking, pick-pocketing, shop-lifting, “making them an offer they can’t refuse,” and other types of outright theft and extortion. In sharp contrast, the only way that Musk can take over Twitter is by purchasing shares from present stockholders. Will he hold a gun to these shareowners and demand they sell him their property? Don’t be silly, of course not. Rather, he will offer to pay them for their holdings, which under free enterprise means any sale would consist of “capitalist acts between consenting adults” in Robert Nozick’s felicitous phraseology. Hostile takeovers? Fughedaboudit, as we say in Brooklyn.

Suppose Alex and Barbara are dating. Along comes Charlie, who wants to take Alex’s place in Barbara’s affections. Alex will likely regard Charlie’s overtures to Barbara as unwarranted and unwelcome; he will see this as “hostile.” But it will be hostile only to him, and he and Charlie are not directly dealing with one another. In sharp contrast, Charlie has no hostility toward Barbara, nor she to him, if she agrees to his advances. Thus, the Twitter board might feel hostility from Musk, but he’s not dealing with them; rather, he’s attempting to engage in commercial activity with the stockholders. If they agree to sell their share to him, there can be no “hostility” between them.

From whence, then, springs the concept of “hostility”? It stems from the fact that in the typical case, the acquirer sees the employees of the target firm as inefficient. He thinks the present low share price is accurately based upon their ineptitude. The would-be buyer intends to replace present management with more effective executives, and earn a profit based on the higher share price that will emanate from greater efficiency. It’s these managers, and only them, who deem the takeover bid as “hostile.”

What then is the poison pill? It consists of a discriminatory act on the part of the owners of a company.  The flip-in variety, the most commonly used, allows all present shareholders—except for the so-called “hostile” buyer—to acquire newly minted shares at vastly lower than market prices.

Usually, this poison pill kicks in at a given percentage of share ownership. Twitter would presumably have no objection to even a hostile buyer taking a small position in its firm, say, 2 percent. But they have now set 15 percent as the cut-off point: If Musk exceeds that level, the poison pill then takes effect.

Now for the big question: Is this tactic justified? At the outset, it would appear not. After all, it’s discriminatory. It singles out certain individuals for ill treatment. Musk at this stage is the only one so mentioned, but it can easily be extended to include others. Presumably, this would embrace any of his colleagues who favor open debate and work with him to take over this company. If Musk were a member of a protected group, this would clearly be against the law. But from a free enterprise point of view, the be-all and end-all of commercial interaction is free association. No one may be forced to deal, commercially, with anyone else against his will. If the shareholders of Twitter want to discriminate against Musk, for any reason at all, that would certainly be their right.

One big question is, will a majority of the present stockholders of Twitter agree to employ the poison pill? If so, there’s nothing in the free enterprise ethic that would prevent them from so doing. On the other hand, if a majority do not vote to dilute the value of their shares in this manner, it should be legally impermissible for them to engage in this strategy.

But Musk is not without power in this struggle, even apart from the fact that he’s not exactly poor. The obligation of the board is to the stockholders, to elevate the value of their shares. When they employ the poison pill they take the exact opposite position: They’re attempting to prevent shareowners from selling at the highest price possible. If there’s no vote, or, if the stockholders oppose the poison pill in an election, and it’s employed by the board anyway, the members of this board will be vulnerable to lawsuits claiming they were derelict in upholding their fiscal responsibility.

Suppose Musk’s bid fails. Are we then consigned to webs of this sort allowing, only, one side to be heard in all important debates? (Twitter banned Donald Trump from contributing; even Bernie Sanders expressed himself as “uncomfortable” with that tactic). Not a bit of it. If Musk can afford to take over Twitter, but is legitimately poison-pill blocked from doing so, he easily has the wherewithal to set up a competing organization.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Walter Block
Walter E. Block is the chair in economics at Loyola University in New Orleans. He is also an adjunct scholar at the Mises Institute and the Hoover Institute.