Twitter initiates 'poison pill' to block Elon Musk's takeover bid

The board will give some shareholders the right to buy more stock under certain circumstances.

Dado Ruvic / reuters

The Twitter board isn't willing to let Elon Musk buy the company without a fight. The board members unanimously approved a limited duration shareholder rights plan, which will be in place for one year starting today.

The rights will come into play if a single entity acquires at least 15 percent of Twitter's outstanding common stock without the board's approval. Should that become the case, certain shareholders will have the right to buy more stock. Flooding the market with new shares to dilute other investors' holdings is called a poison pill strategy, and it's designed to ward off a hostile takeover attempt.

Musk briefly became Twitter's largest shareholder when it emerged he had quietly snapped up a 9.2 percent stake in the company. He was offered a seat on the board and if he had accepted, he would not have been allowed to build up an ownership stake of more than 15 percent. Musk turned down the board seat earlier this month, though. This week, Musk made an offer to buy the entire company for around $43 billion.

The company said in a press release that adopting the rights plan will "reduce the likelihood that any entity, person or group gains control of Twitter through open market accumulation without paying all shareholders an appropriate control premium or without providing the Board sufficient time to make informed judgments and take actions that are in the best interests of shareholders." In other words, the move will make it harder for Musk to take his buyout offer directly to shareholders and acquire their stakes in piecemeal fashion.

Twitter says the plan is similar to one carried out by other publicly traded companies that have been subject to a non-binding acquisition proposal. Notably, the rights plan doesn't prevent Twitter from accepting a buyout offer if it believes that's in the best interest of its shareholders.

Musk claimed in his buyout offer Twitter has "extraordinary potential" and that he would "unlock it." During a TED Talk just hours after making the proposal, Musk argued that Twitter's algorithm should be open source, "so anyone can see [...] there's no sort of behind-the-scenes manipulation, either algorithmically or manually." He also suggested he'd err on the side of having less moderation and expressed reservation about issuing permanent bans to users who break the rules.