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Comment by ceejayoz | Hacker News Reader

If someone buys more than 15% of shares, they can issue more shares to other people to dilute them.

Which other people would get those shares? Would that be considered taxable income for the recipients? If I were a regular shareholder and my shares were diluted without compensation, I'd be pissed...

As far as I know it has never been done in practice but is sure seems like it would have a huge amount of fallout for existing shareholders. Would the board actually pull the trigger knowing this? On the other hand poison pills are widely used and have generally been considered a credible defense.

They don't have to pull the trigger; it's already set up. These triggers never get pulled because it's irrational for a hostile acquirer to play chicken with them; it's like playing chicken with a brick wall.

Every other shareholder gets access to the shares. So the effect is: you can buy $420 worth of twitter stock for $210 unless you're elon musk or working in concert with elon musk.

Some poison pills just give the shareholder extra shares -- it's basically a stock split except for the targeted shareholders.

As described above, it would be like a stock dividend or split (except for the 15%) - no income, no capital gains, no dilution.

In reality, this poison pill is more complicated - from Matt Levine: "The main mechanism of the pill is that if Musk or anyone else acquires more than 15% of Twitter's stock, then every other Twitter shareholder will have the right to pay $210 to acquire $420 worth of Twitter stock (at then-current market prices)."

He also points out that this is moot except in the highly unlikely event that it is triggered - in which case, someone screwed up really badly.

So the discount for existing shareholders is only 50%? That still requires pretty significant investment from their side, what if they can't come up with enough money? Poison pill becomes uneffective, right?

Why wouldn't existing shareholders buy heavily discounted stock, knowing that there's a good chance Musk will go all in and pay a premium for it?

Maybe because they do not have the money, and because it's not certain that musk will go all in.

> Which other people would get those shares?

The offer is extended to existing shareholders.

So if you own 10 stocks you will be allowed to purchase 10 more stocks at a vastly reduced cost.

Something like that.

This way you can screw over the corporate raider without screwing over existing stock holders.

The poison pill is blatantly unethical. The fact that it exists as a tactic where a company can target a specific shareholder and dilute them exclusively, while also diluting other shareholders who don't have the money to participate in the poison pill, is yet more proof that the SEC is a garbage organization.

It's been settled corporate law for decades, and it serves a clear purpose: without poison pills, hostile buyers can also do blatantly unethical things, like coercive lowball bids that punish shareholders that don't tag along.

The other shareholders don't need to have the money:

"Another, perhaps more practical provision of the pill says that the board can just exchange each right for one share of stock, for free, meaning in essence that the board can double everyone else’s number of shares of Twitter while holding Musk’s constant, without asking anyone to put in more money." (From a recent Money Stuff.)

It also gives reasons why poison pills were allowed by the Delaware Supreme Court (and not the SEC).

That seems even worse then; it's effectively the board voting to steal shares from a major shareholder in order to increase their own relative stake in the company. How is that not illegal?

What used to happen before there were poison pills, was a corporate raider would say "I want to buy this company, and I offer 100$ per share. If not everybody agrees to sell to me, but I get more the 50% of shares I will replace the board and then offer a merger in which 30$ per share are offered. The board (which I just instituted) will agree to my offer." That means after a raider has the majority of shares he can stiff the remaining minority shareholders. Of course people knew this on the initial offer and were therefore pressured to accept it or risk losing a lot of money later. I assume you agree that making this possible is not in the interest of sharedholders (or companies), although it made some people very wealthy back in the days. The Delaware Supreme Court considered, that such an extreme threat to shareholders justified extreme countermeasures such as the poison pill. (All of the above just tries to paraphrase Matt Levine, which I can really recommend if one wants to understand such things.)

Why would the newly installed board be allowed to allow a merger with such a low number?

This seems to be the root problem, and it can happen in other scenarios when a coalition controls 51% of the shares. The law needs to protect the minority shareholders.

This poison pill “solution” is just theft.

If one was ever triggered the diluted shareholder would sue for the direct economic damage they suffered as a result. But they still wouldn't end up controlling the company, they'd just get paid out the cash value that was literally stolen from them-- instead everyone would just lose a lot of money to lawyers... which is why, AFAIK, none has ever been triggered.

That explanation sounds like they are just giving away shares, which they aren't. Other parties get the _right_ to buy additional new shares at a reduced rate.

> Other parties get the _right_ to buy additional new shares at a reduced rate.

This is effectively the same as giving away shares.

I think that oversimplifies the dynamics drastically.

First off, even if buying the shares at the reduced rate is highly profitable, you do need the cash to buy them. With the 50% that are floating around here that's a significant amount of cash.

Furthermore, with the dilution that's happening the stock price would also drop so while you gain on the reduced shares, you loose on money on your old shares unless Elon keeps buying.

I just don't see that it's the same as giving away shares for free (which is just adding dilution without additional capital costs for the existing shareholder). Feels to me like an all parties lose situation if it's triggered.

The other shareholders don't need to have the money:

Ahh, thanks

I don't understand how that's not financial fraud.

What would be fraudulent about that? Companies issue & retire shares all the time, for lots of reasons.

Yeah but they usually don't do it with the express purpose of screwing over an investor - and when they do, there are consequences (like FB).

You're not making a case for this being fraud. Why would this be fraud rather than a sharp-elbow business tactic? "Fraud" has a concrete meaning; for this to be a fraud, one would need to be able to identify precisely of what Musk has been defrauded.

The poison pill clause is part of the shareholder contract, often specified in the articles of incorporation.

Oh, if they execute the poison pill there will be consequences, just not legal ones.

Trust is a big part of stock value, if you don't trust the board is time to sell...

The poison pill is fighting off a hostile takeover, by someone who has offered a first-and-final-offer. It would be screwing the other investors to have zero negotiations for a better deal.

Because fraud requires deception and there’s nothing deceptive about a poison pill that makes the news.

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