Control issues

The tussle over Twitter in the US provides food for thought for Australian boards faced with change-of-control decisions, writes Professor Pamela Hanrahan.

When sectors and economies are in transition, change-of-control transactions increase. PwC recently reported that the number of announced mergers and acquisitions (M&A) deals in 2021 exceeded 62,000 globally and publicly disclosed deal values reached US$5.1 trillion. This included 130 megadeals with a deal value greater than US$5b. PwC put this down to “intense demand for technology, and for digital and data- driven assets, and the pent-up deal-making demand from 2020”.

In Australia in 2022, we can add a wave of demergers and divestments in industries that are exposed to climate transition risks, and ongoing rationalisation and consolidation in superannuation funds and other parts of the non-bank financial sector.

Boards may seek these deals or have them thrust on them. Either way, in public companies, directors can quickly find themselves navigating highly technical legal requirements, either in the takeovers code or for implementing schemes of arrangement. Disclosure burdens are significant. Competition considerations and foreign investment controls may come into play.

Change-of-control transactions in privately held businesses also have their complexities. The decision by a founder or controller to sell a private business or accept outside capital can trigger fiduciary obligations to other shareholders, especially in quasi-partnerships or family companies where some owners have more information than others.

In major deals, the boards of bidders, targets and institutional owners are increasingly confronted with a range of stakeholder interests and concerns that extend well beyond the price at which control of the business or asset changes hands.

Twitter tangle

Elon Musk’s recent bid for control of Twitter Inc in the US shows how complex and sensitive these transactions can be. Musk’s publicly stated aim for the bid was not primarily financial — it was to change the way in which Twitter functions as a “platform for free speech around the globe”. Media reports indicate he planned to loosen Twitter’s content moderation policies and retreat from measures to expel bad actors from the platform. The broader political and social implications of the bid are obvious.

In May, a Florida pension fund commenced class action proceedings in the Delaware courts contesting the US$44b transaction on technical grounds in Orlando Police Pension Fund v Twitter Inc et al (Delaware Chancery Court No. 2022- 0396).

The court documents include a fascinating narrative of the early stages of the Twitter bid. Musk began acquiring shares (referred to in the US as “common stock”) in Twitter, which was listed on the New York Stock Exchange, in January 2022. In early April, he filed a (late) notice with the US Securities and Exchange Commission showing that he had acquired beneficial ownership of 9.2 per cent of the company. That same day, he and Twitter agreed that he would join the board, with a standstill agreement capping his holding at 14.9 per cent.

Four days later, the deal was off. On 13 April, Musk wrote to the chair of Twitter saying that he would make a bid to buy 100 per cent of the stock and take Twitter private. On 15 April, the Twitter board responded by adopting a “poison pill” defence, which gave other stockholders the right to acquire additional stock at a discount if Musk moved beyond 15 per cent. This was intended to frustrate Musk’s ambitions. At this point, Twitter co-founder and director Jack Dorsey broke ranks, tweeting on 16 April that the board had “consistently been the dysfunction of the company” and falling in behind Musk.    

On 23 April, Musk reportedly informed Twitter of his intention to launch a hostile bid, and on the following day, the board decided to agree to support the change of control. On 25 April, Twitter entered into a merger agreement with Musk, which would pass control to him subject             to a requirement that the sale was approved by a simple majority of Twitter stockholders.

Call the police

This is where the Orlando Police Pension Fund’s court challenge came in. The Delaware takeover laws are different from Australia’s, so some background helps. Under Delaware law, if Musk was an “interested stockholder” before 25 April, then the acquisition could not complete before 2025 unless it was approved by two-thirds of Twitter’s disinterested stockholders. The approval of a simple majority of all stockholders was not enough. An “interested stockholder” is someone who owns at least 15 per cent of the company — and this includes stock held by the person and anyone who, in the Australian language, is their associate. The fund alleged that Musk’s pre-existing arrangements with other key stockholders — including his financier Morgan Stanley, director Jack Dorsey, and Saudi Prince Alwaleed bin Talal — took him over the crucial 15 per cent threshold.

The Orlando Police Pension Fund’s claim under Delaware law included that whole board “owed [it] and the other public stockholders of Twitter fiduciary duties, including a fiduciary duty to ensure that [the takeover law] is not violated and that Twitter stockholders are provided the vote statutorily required”. The fund also argued that the directors breached their fiduciary duties by entering into the merger agreement, which did not provide for the statutorily required vote, even though they “knew or should have known that Musk became an ‘interested stockholder’... prior to the time” they agreed to the takeover.

Takeovers in Australia

This kind of real-time technical litigation in public company takeovers no longer occurs in Australia, where the issues — including frustrating actions and associations — that arose at Twitter are dealt with instead under the Takeovers Panel’s broad “unacceptable circumstances” jurisdiction. Also, Australian directors do not (ordinarily) owe fiduciary duties to shareholders directly, which shifts the litigation balance.

But the battle over Twitter provides a compelling thought experiment for Australian boards that may be contemplating, or are confronted with, change-of-control transactions with wider stakeholder impacts. It also challenges boards of institutional investors, including superannuation funds, that will increasingly find themselves in the position of the Orlando Police Pension Fund.

In all things, Australian company directors are required to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose.             

This is reflected in s181 of the Corporations Act 2001 (Cth) and includes not interfering in ownership questions that are appropriately left to shareholders. Institutional investors deciding to buy, sell or hold sensitive investments must act in the best interests of the beneficiaries whose money they manage.

Recent amendments mean that directors of Australian superannuation funds are required to perform their duties and exercise their powers in the best “financial” interests of the members of the fund in these and other decisions, whatever that might mean here.

The technical case run by the Orlando Police Pension Fund does not test the legal, ethical or commercial accountability of the Twitter board for either enabling or blocking Musk’s ambitions for the platform, beyond the strictures of the Delaware takeover laws. However, in these and other complex transactions, including in Australia, public opinion increasingly will.