ItAre Elon Musk and Twitter serious? It is hard to believe, given his history of trolling and unfounded provocations.
Dubious offers happen, but CEOs of public companies with multibillion-dollar market caps don’t typically propose them. Musk frequently uses Twitter to divert attention away from the negative news about his company and companies. He now claims that he is interested in owning this social giantphone. I think Musk’s tender offer to buy Twitter will fall apart because everyone, including government regulators, should be on to his games.
Twitter on April 15th, as you know, launched a poison pill attack against Musk. It is almost impossible to get enough Twitter shares for Musk’s control. Musk could try to fight it in court, but “no court has overturned a poison pill in the last 30 years,” according to Columbia University law professor John C. Coffee Jr.
Musk might have difficulty pitching Twitter if the U.S. Securities and Exchange Commission properly disqualified him for his previous attempts at such antics. When the SEC settled with Musk in 2018 for casually tweeting about taking Tesla private at $420, the commission ordered him to step down as Tesla’s chairman but allowed him to continue as CEO. Musk continued to be Tesla’s largest shareholder, with approximately 21.7% of Tesla’s outstanding shares at that time.
Former SEC Chairman Jay Clayton said Musk’s penalty “reaffirms an important principle embodied in our disclosure-based federal securities laws. Specifically, when companies and corporate insiders make statements, they must act responsibly, including endeavoring to ensure the statements are not false or misleading and do not omit information a reasonable investor would consider important in making an investment decision.”
After the settlement, Musk’s ownership share grew — to 23.1% by the end of June 2021, according to Tesla’s proxy. If the SEC had barred him from the CEO job he’d perhaps own fewer Tesla shares that he could use as collateral for a Twitter takeover. Musk, who was Tesla’s CEO for the second half of 2021, was able exercise large amounts of his vested stock options and made billions of dollars. Later, he sold enough stock options to reduce his ownership to 17% at the close of the year. When he exercises the rest of the stock options he’s been awarded since 2018, he could bring the percentage ownership back up to nearly 24%.
The SEC should have also barred Musk from serving as an officer or director of any public company, a so-called D&O bar, back in 2018. Since financial penalties have minimal impact on multi-billionaires, in its original complaint the SEC originally sought a full D&O bar against Musk. This is what the agency does in over 70% of cases involving single defendants. In the end, Musk’s lawyers helped him avoid that penalty, and regulators relented, perhaps because of Musk’s unusually close association with Tesla.
If regulators had taken those punitive steps, Musk’s options for acquiring another public company like Twitter would be severely limited. Afterall, waging a proxy fight–one that starts with Musk taking a board seat and then gaining control by winning friends and influencing other board members who then vote him Ruler for Life–doesn’t seem to be his style. He quickly changed his mind and accepted a seat on the Twitter board.
More than 22 million people followed Musk on Twitter after he settled with the SEC over Musk’s inept bid to privatize Tesla. Musk’s cult has grown rapidly since. His Twitter following now exceeds 82 million. He continues to ignore traditional media outlets by tweeting obsessively to defend himself and clap back to perceived enemies such as the SEC and journalists. His tweets are now the main source of news coverage about Musk and his companies as well as his crypto investments.
Because the SEC, and Department of Justice, didn’t stifle Musk’s shenanigans when they had the chance, he’s been free as a bird to tweet long and loud about whatever multi-billion dollar deal he’s hatching up. Musk never stopped tweeting disapproval about the government regulators and settlement. His 2018 tweets ensuing in a dispute with the SEC have led to him being threatened with contempt. Musk’s lawyer even accused the SEC of harassing his client with repeated enforcement activity since the SEC’s sanctions, according to this Tesla filing.
The Wall Street Journal reports that the DOJ (and SEC) are currently investigating stock sales made by Elon Musk, his brother Kimbal and other members of the Tesla board. Another Musk tweet prompted the investigation. Elon Musk had tweeted his brother Elon a poll asking him whether to sell 10% of his shares. Musk also sold $108,000,000 of his shares the previous day. Musk started selling soon after that tweet.
The investigations were conducted amid other legal difficulties for Musk and his businesses, which include a judgment of race discrimination that requires Tesla to pay $15m to a former contractor. A California lawsuit alleging discrimination in a Tesla factory and an investigation by the Department of Justice at SpaceX regarding alleged discriminatory hiring practices.
Even some deals that Musk has fully consummated haven’t gone well. With Tesla’s 2016 acquisition of Solar City, analysts didn’t see a strategic or business rationale at the time. Shareholders also objected to what they believed was a non-arm’s length transaction mired in the appearance of conflicts of interest because the two companies were entangled at a personal and business level for Musk. Shareholders eventually sued, claiming Musk coerced the company’s board into the deal. The Delaware court ordered Musk to pay Tesla $13 Billion in damages. It is expected that a decision will soon be made in this case.
In his Twitter bid Musk repeats his 2018 intention “to retain as many shareholders as is allowed by the law in a private company”. He was going to make that happen for Tesla. A “special purpose fund” would enable any shareholder to retain its Tesla investment. Ann Lipton, a law professor at Tulane University wrote in 2018 that wouldn’t work and nothing has changed since.
In the past two weeks, Twitter’s investor sentiment has been on an up-and-down rollercoaster. With each Musk tweet and announcement, it is bouncing back and forth. Twitter’s stock jumped up over $50 with news of Musk’s initial 9.1% stake and then fell back to $45.08 on April 14, closing significantly below Musk’s offer of $54.20 a share before the extended holiday weekend. Twitter opened slightly higher at the start of this week but still nearly 15% below Musk’s bid. By midday Tuesday it was sinking again with ongoing doubts about Musk’s funding and the news that several private equity firms were contemplating a stake, but most as a “white knight” to rescue Twitter from Musk.
Twitter users, what Musk has referred to as a “de facto town square”, are arguably an important arbiter of the viability of the deal. Sentiment analysis using Google Trends, Brand24, and Social Search on the key dates of the Twitter acquisition campaign, shows the “de facto town square” doesn’t believe Musk either. Negative sentiment overtook positive on April 9 when Musk decided not to join the Twitter board and then spiked dramatically negative on April 14 when he admitted he was not sure he’ll “actually be able to acquire it.”
Dennis Howlett (a Twitter early adopter who is also the retired cofounder of Diginomica) has had enough. “The SEC needs to rein in this man’s child-like behavior. Twitter is now toxic because of his behavior. No right-minded investor would try to buy it now.”
As for me, I agree with historian and culture critic Ruth Ben-Ghiat, who said in a recent interview that there’s only one way to stop a personality cult that repeatedly ignores the rule of law. “It takes prosecution and conviction to deflate their personality cults.”
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