Explainer: What is poison pill?

Elon Musk is attempting to take over Twitter Inc., but the company is refusing. Although he has long chafed at what he perceives as unnecessary constraints on expression on the social media platform, Musk, the chief executive officer of Tesla Inc. and the world’s richest man, isn’t fully clear why he is battling to buy the social media platform and take it private. The storm of financial words being flung around, with “poison pill” arguably the most prevalent, is also perplexing to many.

Poison pill

Each poison pill has different contents, but they’re all meant to allow company boards to flood the market with so much freshly minted shares that a takeover becomes prohibitively expensive. When publicly traded corporations were being pursued by corporate raiders like Carl Icahn – now more often known as “activist investors” – the technique gained traction in the 1980s.

Twitter didn’t reveal the details of its poison pill on Friday, but claimed it would do so in a future filing with the Securities and Exchange Commission, which it had postponed since public markets were closed.

If a shareholder builds a position of 15% or more on Twitter, the plan will be triggered. Musk, who is best known as the CEO of the electric car company Tesla, now has a 9% share in the company.

Poison pills, while intended to deter an unsolicited takeover, frequently open the door to further negotiations, forcing a bidder to sweeten the deal. If the board agrees that a higher price is justified, the poison pill can be tossed aside, along with the ensuing acrimony, allowing the sale to proceed.

Twitter, as is customary, left the door open by stating that the poison pill will not prevent the company’s board from “engaging with parties or accepting an acquisition proposal” at a higher price.

Musk, a prolific tweeter with 82 million followers on Twitter, was unresponsive to the company’s poison pill right away. On Thursday, though, he stated that he was prepared to go to court.

“If the current Twitter board takes actions contrary to shareholder interests, they would be breaching their fiduciary duty,” Musk tweeted.

(With inputs from AP)