The Twitter Board Bears Personal Responsibility for a Bad Outcome in the Twitter Sale

Let’s be clear about this: The Twitter board was under no legal compulsion to accept Elon Musk’s offer for the company and, from a corporate governance structural point of view, was in an unassailable position until the 2024 shareholders meeting.  The single motivating factor in its decision, apparently, was that the deal was a good one for Twitter shareholders, without apparent regard for how Musk might run the company and the consequence for the social media infrastructure that Twitter had created, much less the public welfare.  In my opinion, the board’s conduct was shockingly near-sighted, and the predictable adverse consequences will be the directors’ personal responsibility.

It is hornbook Delaware corporate law that the board of directors may refuse any and all offers for the sale of the company.  The directors could believe that the “long term value” of the company will be higher than the current offer price.  The directors could believe that the acquiror will operate the company so as to impose external costs on the community. The directors could believe that an acquiror will be insufficiently protective of the company’s stakeholders.

For example, imagine a chemical company that operated a high-cost filtration plant that minimized down-stream effluents to a greater extent than the law required.  A prospective acquiror offers a premium bid but with plans to substitute a lower cost but much less effective filtration system that will increase the firm’s profits.  The company’s board has ample legal protection under the “business judgment rule” to operate the firm in the low-polluting way and is not obliged to accept a bid from an acquiror who it knows will operate the firm differently (even if also legally).

In one of the most famous cases in corporate law, Paramount Communications v. Time, Inc., decided in 1989, the Time board favored a merger with Warner over a much higher cash bid from Paramount in part because the terms of the merger protected “Time culture.” This included a board seat for the editor of Time magazine and an understanding that the editorial independence of the magazine should not take a back seat to business considerations.  The Delaware Supreme Court held that Time’s defensive measures against the Paramount bid were “proportional” and permissible.

Suppose Elon Musk shows up with a “blow out bid” for the New York Times Company?  Is the board obliged to accept?  Of course not.

The only circumstances in which a board must attempt to maximize an immediate payout to shareholders (and put aside concerns about other constituencies) is where the board has already put the company up for sale or entered into a transaction that would result in a shift to a new controller.  Having started the ball rolling, the board cannot discriminate among potential acquirors.  This means that now, the Twitter board would have to entertain potential over-bidders. But it need not have taken the first step of a Twitter sale.

What about the practicalities of shareholder preferences?  Under the Delaware system, a board can stand behind its poison pill, “just say no,” until new directors are elected who may redeem the pill and presumably negotiate a friendly deal. The current Twitter board stands for election in May 2022 without any announced opposition.  The Twitter board is currently “classified,” meaning that one-third of the directors are elected annually for three-year terms. As part of a settlement with an activist, the Twitter board agreed to propose “de-staggering” the board, an annual election of all the directors.  This proposal, which requires a super-majority vote, failed when proposed at the 2021 annual meeting.  Even if adopted at the 2022 meeting, it would not have practical effect until the 2024 meeting.  Only then could Musk get control of the board and see the pill withdrawn.

To be clear, in agreeing to sell Twitter to Elon Musk, the Twitter board has acted within its fiduciary duties.  But it is not obliged to sell to him, and in particular it is not obliged to sell without a thorough vetting of his plans for the site and entering into particularized agreements about how the site would be managed. Some of Musk’s tweets about “free speech” suggest an alarming unwillingness to distinguish between the constraints that a government may impose and the speech constraints that may be imposed by a private party like Twitter and, indeed, that would be responsible to impose.

If Twitter becomes a megaphone for misinformation and hateful speech, I think the Twitter directors will bear personal responsibility.  They did not have to sell; they could have done more to protect the public.

This post comes to us from Jeffrey N. Gordon, the Richard Paul Richman Professor of Law at Columbia University and co-director of the Millstein Center for Global Markets and Corporate Ownership.

3 Comments

  1. Patrick Dunn

    The directors accepted the sale of the company at a price that, thanks to the 67% premium, delivered returns in line with the rest of the market over the 8+yr lifetime of the company (208% vs 210% SPX). While directors of public companies may have an obligation to consider the “protection of the public,” that is not their main or even basic remit; how would that even be identifiable or measurable?

    There are numerous headwinds the space is facing, including tangible negative health impacts for society, akin to the pollution analogy mentioned in this piece. Leaving the mental health issues and collateral damage like less exercise to the side for the minute, research shows the damage to tear ducts in young people driven by various forms of screen time (but broadly attributable to social media) is quite real and worrying. The “I would choose smoking over social media if my children were to pick one” proclamation continues to reverberate through social circles, most certainly the same public being proposed to need protection.

    Should those headwinds increase as more data on the impact of such platforms on overall health are available, surely valuation of the asset will suffer, regardless of the content? As our COVID experience showed, 24+months waiting for a shareholder meeting could become an eternity. Is it not reasonable for directors to approve getting their investors out of a clearly challenged equity story at “market performance”?

    Moving onto founder/CEO departures as it relates to valuation: Twitter is down 20% since Dorsey resigned in November, Amazon is down 30% post Bezos (This could simply be part of the broader FANG-driven correction in names of this ilk but it could also be a harbinger of future price action/performance of such assets). Who has the best insight into future performance if not the founder and CEO?

    Finally, while it is difficult to disprove future statements like ‘‘long term value could be higher” and/or “insufficiently protective of the company’s stakeholders,” surely the opposite is also possible. After all, the space is littered with examples of shining unicorn turned moldy tombstone: including foursquare, Friendster, and MySpace selling for a paltry $35mm vs. a prior $12bn valuation, to name a few.

    Should directors put shareholders into financial risks they may or may not agree with on the basis of an amorphous “protection of public good,” as determined by the judgments of a handful of people who happen to be close to the company? I suspect that Twitter, if it proceeds to become the aforementioned megaphone, would face a vast, coordinated exit (led by @CLSBlueSkyBlog no doubt), a crash in the valuation of the asset, and likely a strong increase in valuation of the alternative. For better or worse, that forms a large portion of the recourse in market-driven societies of social injustices. But perhaps we should allow this forecasted weapon and demonization of the platform happen before we declare the outcome a bad one, let alone assign blame?

    I believe the directors did the right thing for their investors. They are, after all, called social media companies; not social media charities. As for the rest of it, let’s see how it plays out.

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