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.