41

This might be a simple question but the answer escapes me.

Elon Musk wanted full control of Twitter, so he bought every outstanding share and made the company private.

Couldn't he have achieved the same result by buying only 50%+1 while leaving the company public, so he could control the board like Mark Zuckerberg controls Meta?

Martín Fixman
  • 531
  • 1
  • 4
  • 8
  • 21
    I’m voting to close this question because it is not about personal finance. – Dilip Sarwate Nov 05 '22 at 14:20
  • 19
    What would be a better SE forum for understanding how companies and the stock market work? – Martín Fixman Nov 05 '22 at 14:27
  • 1
    We have an [economics.se] site, but I don't think it would be on topic there either. If not then there probably isn't one. – DJClayworth Nov 05 '22 at 14:33
  • 18
    One important difference is that with 100% ownership he can take the company private and do whatever he wants to the company without having to bother with a board of directors or required reports to regulators. – Brian Borchers Nov 05 '22 at 14:49
  • 1
    Why can't he change the rules with control of half the company? – Martín Fixman Nov 05 '22 at 14:54
  • 1
    Not sure, but a supermajority might be required for some actions such as taking the company private. Minority shareholders have some rights so the majority can't take advantage of them. You normally can't force someone to sell their shares but in acquisition like this, you can. – minou Nov 05 '22 at 17:03
  • 61
    This question shouldn't be closed. It is helpful for normal people who just own stock to know how this kind of thing works. – minou Nov 05 '22 at 17:07
  • 7
    There's lots of things people might want to know (whether they own stocks or not) but this isn't necessarily the site to answer them. – DJClayworth Nov 05 '22 at 20:14
  • 23
    @DilipSarwate Twitter was a publicly traded company, making their stock an issue of personal finance. If individual members of this SE personally owning stock in a company as part of their finances doesn't make understanding how that company works on-topic, then a lot of questions are off-topic. Like, is "Why do companies do buy-backs instead of dividends" on-topic? That's a corporate finance question. – Acccumulation Nov 06 '22 at 01:43
  • 5
    @DilipSarwate This site is about "personal finance" AND "money". – 7529 Nov 06 '22 at 18:21
  • 2
    @7529 The adjective "Personal" applies to both Finance and Money, not just to Finance. – Dilip Sarwate Nov 06 '22 at 19:35
  • 10
    @DilipSarwate I don't think so, since "personal finance" uses one font, and "money" uses a different font. – 7529 Nov 06 '22 at 20:05
  • Related: How is it legal for Twitter to dilute the share of one specific shareholder? – JonathanReez Nov 07 '22 at 15:35
  • @MartínFixman -- states have laws that apply to corporations incorporated in the state; they protect, to a greater or lesser degree, depending on the state, the rights of minority shareholders. Owning 51% isn't a license to do whatever you want. – Pete Becker Nov 07 '22 at 16:46
  • 1
    @DJClayworth Which is sad really, because if there isn't a StackExchange site to answer the question there really isn't a site anywhere and nobody can get a real answer. (I'm only half joking...) – Andy Nov 07 '22 at 17:55
  • Brian Borchers is correct but the real answer is he made the offer as a joke and didn't want to actually go through with it. – BooleanCheese Nov 07 '22 at 20:38
  • 2
    See https://money.meta.stackexchange.com/questions/1949/should-we-remove-the-money-part-from-the-site-name-and-logo-to-prevent-repe for background on the name of the site. – GS - Apologise to Monica Nov 07 '22 at 23:45
  • Related: https://money.stackexchange.com/questions/133658/can-someone-just-forcefully-take-over-a-public-company-for-its-market-price/133661#133661 – Hart CO Nov 10 '22 at 14:56

2 Answers2

62

Summary: Twitter's board had good reason not to let Musk do this, and had tools to prevent him from doing it.

The board of a corporation has a fiduciary duty to preserve the value of all shareholders, and not just 51% of the shareholders. To your question, it would have been possible for the board to let Elon Musk acquire a controlling (51%) interest in Twitter stock, by buying that stock on the open market, but that leaves the 49% of remaining stockholders with a rather unequal result of now having stock with no voting power, but not receiving any compensation (since they didn't sell). Maybe that's fair, maybe it's not, but it's the kind of thing likely to land the current board in a bunch of lawsuits which they don't want.

Instead, the outcome the Board wants is for Musk to make a "tender offer", where he agrees to buy all the stock, not just 51%, at a fixed price (which is what actually happened). This satisfies their fiduciary duty to all shareholders, since all shares are equally treated.

It's worth noting that the board took concrete actions to make Musk make a tender offer (as opposed to buying his way to 51% on the market). At the point at which Musk disclosed his initial 9% stake, the board introduced a "poison pill", which is a mechanism where if Musk (or anybody, but nobody else was trying) acquired more than x% of the stock, that shareholder's stock would become diluted (by giving all other shareholders a dividend creating new previously unissued shares). The board later retracted this poison pill once Musk began making his tender offer, having served its purpose.

Back to fiduciary duty, it seems like the poison pill clearly violates equal treatment of shareholders, because they're diluting a single shareholder's shares. However, US courts (specifically Delaware courts) have consistently upheld poison pills, because it protects the wider fiduciary duty to not allow 49% of shareholders to get screwed in acquisitions.

Peter Mortensen
  • 341
  • 2
  • 6
letterX
  • 762
  • 6
  • 7
  • 48
    Also, regarding votes to close as not relevant to Personal Finance: understanding why corporate boards can't make a decision to just zero the value of 49% of stockholders is relevant to understanding the value of your stock during an acquisition process. – letterX Nov 05 '22 at 17:25
  • 1
    I was just thinking about how markets would react with news of a 51% buy, and that the 49% left could just be holding the bag. It would be crazy pants. –  Nov 06 '22 at 02:59
  • 6
    This answer makes clear how it was in the former board's and former shareholders' interests to force Musk to buy 100% rather than 51%, but is it not also in Musk's interests (notwithstanding that 100% costs him a lot more)? Besides the reasons mentioned in the other answer, if he used a 51% stake to fire the whole board of directors and install himself in their place, the other 49% of shareholders might still sue him (in his capacity as sole director) if he acted in a way that negatively affected the value of their shares. – kaya3 Nov 06 '22 at 03:00
  • 9
    It's a wonderful example of how running businesses for "shareholder value" is a terrible way to run a business. – Jack Aidley Nov 06 '22 at 09:58
  • 11
    @JackAidley how is this situation an example of that? I'd say "If you want to run the business, you have to compensate all the current owners rather than half" is morally better than "You can take over a business and leave 49% of it's previous owners in the lurch" – Caleth Nov 07 '22 at 11:34
  • 1
    How does this fiduciary responsibility relate to companies where a founder owns a controlling interest? E.g. Zuckerberg owns controlling interest in Facebook, so the rest of the shareholders can't override anything he wants to do. – Barmar Nov 07 '22 at 16:24
  • 2
    @Barmar: There are controlling interests and controlling interests. If you have 51% of stock, then you definitely have a controlling interest and nobody can take it from you (except via some unusual mechanisms like bankruptcy). If you have less than 50%, you might still be informally described as having a "controlling interest" if most of the other shareholders are random retail buyers and mutual funds (i.e. there's no single other entity who controls anywhere near as much stock as you do), but such an interest could be contested by a sufficiently resourceful activist investor. – Kevin Nov 08 '22 at 08:13
  • 1
    @JackAidley how does this - often correct - sentiment apply here???# – Hobbamok Nov 08 '22 at 10:01
  • @Kevin Because of Class B shares, which have 10 votes/share, Zuckerberg owns 12.5% of Meta's capitalization, but has 58% of total voting power. Of course, since much of his wealth is tied to Meta value, he also has incentive to increase that, which aligns with the interests of other investors. – Barmar Nov 08 '22 at 15:00
  • Of course corporations have a fiduciary duty to preserve the value of stock for all shareholders, not just the ruling 51%.

    What instances can you cite of any corporation in any jurisdiction being held to that?

    What methods can you cite for any group to maintain the value of stock for 51% of its shareholders, without similarly maintaining the value for everyone else?

    How could either of those work, outside of text books?

     – Robbie Goodwin Nov 20 '22 at 18:05
20

The goal was to make the company private.

  • They don't have to file quarterly reports with the SEC.
  • They don't have to report the profitability of the company to the public.
  • If they have a bad quarter the stock doesn't change.
  • There is no need to have an annual meeting where stock owners can submit proposals to force the company to act a certain way.

Public companies have to do those things, private companies don't. 51% ownership held by him and his partners wouldn't have allowed him to avoid those things.

mhoran_psprep
  • 139,546
  • 15
  • 193
  • 389
  • 1
    There is no need to have an annual meeting where stock owners can submit proposals to force the company to act a certain way. Which has definitely been happening at Tesla. The shareholders almost always vote the way the Board recommends/against the activist proposals, but it definitely complicates things. – manassehkatz-Moving 2 Codidact Nov 06 '22 at 02:56
  • 3
    If they have a bad quarter the stock doesn't change. How does a 100% private company have shareholders anymore? – john Nov 06 '22 at 17:09
  • 8
    @john 100% private company does have shareholders. Just not the public one. In this case Musk is the only shareholder. – vasin1987 Nov 06 '22 at 19:16
  • @vasin1987 IMO a better question is "how can a market value of shares which are not publicly traded be relevant at all?" – Dmitry Grigoryev Nov 07 '22 at 09:11
  • 3
    The market value is no longer important, that is one of the benefits of going private. – mhoran_psprep Nov 07 '22 at 11:25
  • 2
    @vasin1987 correction: Musk has full control but he's not the only shareholder: https://mobile.twitter.com/Alwaleed_Talal/status/1585975226567110656 – JonathanReez Nov 07 '22 at 15:40
  • 1
    Disney is another example of a company where every year there are progressive shareholder proposals that are always voted down by a small number of investors that together own controlling interest. – Barmar Nov 07 '22 at 16:29
  • @mhoran_psprep Of course the market value continues to be important. It's just that there aren't competing interests between short term gains and long term gains (or any other agency problems) that make the current market value controversial. It's also illiquid so determining the precise market value is not necessarily possible. – Dean MacGregor Nov 07 '22 at 18:20
  • 1
    @Barmar "progressive" proposals are almost always voted down by the majority of investors, not just a majority of shares. This is because many shareholders view them as at worst, reducing the value of their shares, and at best, serving to distract management from their core duty of increasing the value of their shares. – SafeFastExpressive Nov 07 '22 at 23:48
  • While this answer presents some good reasons to obtain the company as a whole, the fact that the Twitter Board had to threaten Musk not to go for 51% tells me that these arguments weren't enough – Hobbamok Nov 08 '22 at 10:02
  • The question is why private versus just 51%. This answers why private. The decision to get control is a completely different question. – mhoran_psprep Nov 08 '22 at 11:20