I don't really understand how this "poison pill" is legal. Imagine that you own a stock that can be sold at free market at $10/share. Then the board decides that whoever buys those shares will have to resell them to board members at $1. This means that now the price of those shares drops to $1 and you have lost $9 per share. How this can be legal?
That’s not the way it works. So of course it sounds illegal because you’ve made up an illegal scenario.
When the board triggers this clause, they may sell shares to existing shareholders at a discount. These are new shares. Companies have every right to sell shares outside of the exchange they’re listed on… and they do that all the time, through employee grants or options, for example.
When raising funds they generally sell new shares on the exchange, because that’s the highest price they can obtain for the share.. but they don’t have to do that.
And yes, in case you didn’t know, companies can sell as many shares as they want.
There must be some expectation about the rate of share issuance, I think that's what the parent comment is getting at. ESOP pools are well understood (and IIRC defined upfront). Threatening to sell massively discounted shares equivalent to existing shares without even so much as an SEC filing about it (as of a few hours ago), that's the part where it becomes questionable for me. If the new shares are marketable, then this is a defensive measure that actively destroys value for all existing shareholders.
A company cannot issue unlimited shares without concern for existing shareholders - taken to the extreme, doing so reduces the value of all holdings to zero.
Why doesn’t the board just issues shares to existing holders whenever Elon goes over 15%? You effectively dilute Elon out of getting over the 15%? It seems like the only difference with the poison pill is that you have to pay a discounted rate instead of getting new shares for free. But if the company can issues discounted shares to prevent a takeover why don’t they just issue free shares to prevent a takeover?
For example, if Elon goes to 16% ownership why doesn’t the board just distribute new shares to existing owners pro-rata to the point where Elon is back to 15%?
All of this seems pretty sketchy to me. I don’t see how the board is legally allowed to do this.
A company can't pay a dividend to some shareholders but not others. This action would effectively be giving in-the-money call options to some shareholders but not others. Probably legal, but pretty dodgy.
Thanks for the links. Goodness what a mess of a precedent.
Having the board ignore a large shareholder would be one thing. Shares give votes, and terms don't turn over every day, and we don't kick out politicians as soon as the polls turn sour on them. Fine. But if a shareholder has enough shares to change the board composition (or just threatens to) the incumbents can just unilaterally decide that the challenger owns a smaller fraction of the company than they bought on the open market? Maybe it's not technically self-dealing, but it's bad.
Poison pill shares are new shares, issued by the company and then sold to existing shareholders (with the exception of anybody who owns more than say, 15%). Since these shares are sold at a discount to the current market price, it is arguable that existing shareholders are benefiting as they now get more shares at a cheaper price, while also screwing over anybody who is trying to get >15%.
Now, you may argue that it is in the best interest of the shareholders to allow the hostile takeover to go through, but it appears that the strict mechanics of the poison pill do not immediately hurt shareholders.
Actually yes, this is often called "dilution", and it's common in companies that are raising money by selling stock. I'm sure there are complicated rules about when it's allowed and how much is allowed, but I don't know what they are.
They can always do that, by just issuing more shares. In fact, if you buy X shares, the percentage of the company you own could well decline over time. Or increase, in the case of stock buybacks.
If you've ever wondered why corporations have authorized and issued shares, there you go. Increasing the authorized share count requires a shareholder vote. Issuing shares under that cap does not. When shareholders increase the number of authorized shares, they are delegating that decision making to the Board.
It wasn't always like this. But as finance sped up, particularly towards the end of the 19th century, a railroad company which had to hold a shareholder vote to raise emergency equity because their free banking deposits in Nevada went bust would find itself systematically outmaneuvered by the ones who had pre-approval to plug the hole. As a result, most corporations now authorize the maximum number of shares reasonably possible, in almost all cases only moderated by some states' franchise taxes varying by number of shares.
So far I've tried to understand the poison pill and there aren't any satisfactory responses, either on HN or elsewhere in the news.
Wikipedia of Shareholder's Rights Plan is skimp in details as well.
Everything I hear ostensibly appears to be "That should be illegal, makes zero sense". So with no good information out there, it seems like no one is an expert at this and making up bullshit.
I'm interested in this assumption that because you do not understand something, no one else must either. Is this a heuristic you apply to all fields of knowledge, or just business law?
Yes, but that mechanism - issuing and selling new shares - brings in additional external money to the company so that afterwards you own 8% of a bigger pie.
Where do you think all the shares companies offer employees come from? They just make new shares. There is nothing illegal about this as it does everyone equally.
Maybe you are right, but the instant price of stock will probably fall down after "dilution", so for example if you had $10 000 worth of stock before dilution, and you want to sell it the next day, you probably will get less than $10 000 because now there are more shares available in the market (more supply, but the same demand as yesterday).
No, it is wrong to assume that the instant price of the stock will probably fall down after the dilution. It might fall, but it might as well increase, which often is the case, since the company as a whole literally become more valuable (influx of new cash on the balance sheet for the issued shares) and it just gained significant extra working capital that it can use to expand operations.
In this case you rely on a functional rational market in ideal business operating conditions.
If I issue more stocks for a meme stock at the height of it's popularity it will likely go up in price for reasons completely disconnected from the balance sheets and future revenue.
Conversely, if I recently started the process for bankruptcy and issue more stocks to cover the liabilities on my balance sheet, the stock could very well decrease disproportionately to the number of issued stocks.
Stocks at the end of the day are based on the market's perception of the stock's worth. The market is not a single rational actor, rather numerous small irrational actors and a few very large highly rational actors. Obviously there is a spectrum in between, but the ratio of buyers on a given end of the spectrum will influence the behavior of a stock to either align or diverge from the fundamentals of the company, and not always in the way you would intuitively expect.
Imagine there are 1000 shares and Elon got 150 of them, bought at $50 so he owns 15%. If the board now sells 1000 new shares to people who aren't Elon, he now only owns 7.5%.
Yea but that creates downward pressure in the shares too, so there’s a natural limit. Elon could just keep buying more and the market value of the company won’t change. If it did change I.e. you could issue more shares without changing the value of the asset you could just do that all the time from the standpoint of the company and raise infinite money.
So it’s a question of balance. Twitter can raise the fundamental value of Twitter a little bit but there’s no way they can raise it too much without driving the price down and then just having more shares available at lower prices, so like you could just buy 2 shares and spend the same amount of money.
The board can issue new shares (equivalently, diluting existing shares) if it thinks it is in the interest of the shareholders. That’s clearly what they think of the poison pill, but it’s harder to argue that for the hypothetical you are describing
