A Small Part In A Usually Boring Meeting Could Sway Everything

Twitter may live to regret a past promise when investors gather for the company’s annual shareholder meeting next month, voting to possibly discard a top defense against unsolicited takeovers like the one Elon Musk has launched against it.

The company has put up Proposal No. 4 to a shareholders’ vote, and if investors approve it, Twitter will switch how it elects board members. Since Twitter has been a public company, it has organized elections in three-year tiers, meaning, it’s been impossible for a hostile investor to bring in an entirely new panel of directors at a single time. Under the existing system, “it’s only possible to replace a third of the board at a time, so it could take Musk one to two years to replace the board,” explains Ofer Eldar, a Duke University law professor who specializes in corporate governance.

But Proposal No. 4 would change that. If approved, Twitter directors would now stand for election every year. An entire Twitter board could be swapped in a single shareholder meeting. That’s good for someone like Musk.

Let’s play out the scenario: Twitter’s current board sticks to its convictions about Musk and won’t sell him the company. With the existing tiered board set-up, he’d need to wait several years to establish a pro-Musk board.

But, say, Proposal No. 4 passes.Then all Musk needs is to wait until another 52 weeks or so, and he has a shot to topple the board, ensuring his control over the company. Over that year, he’d need to successfully convince Twitter investors to vote for his directors rather than the ones Twitter would suggest. But Musk if proven good at anything, it’s been his ability to push public sentiment toward himself or whatever he’s shilling. In the past, electric cars. In 2023, possibly Twitter board seats.

Why is Twitter supporting Proposal No. 4? For the company, it’s the uncomfortable outcome of another unwanted investor accumulating a persuasive stake in Twitter. In 2020, Elliott Management, the activist hedge fund, purchased roughly 4% of Twitter. It thought the stock was undervalued and didn’t like how then CEO Jack Dorsey was running the place. Investors like Elliott (and Musk) can be disruptive, especially to a company such as Twitter, one perpetual trying to square supersized expectations with disappointing financial performance. So to make peace with Elliott and minimize the chaos, Twitter agreed to a number of Elliott demands, including the board’s restructuring.

Twitter’s shareholder meeting is set for May 25. Meetings like these tend to be dull affairs. The only one that traditionally attracts attention is Warren Buffett’s, which his acolytes treat more as opportunity to convene with each other and venerate him. Other than Buffett’s Berkshire Hathaway gathering, annual shareholder meetings usually draw few eyes—unless a company is in the situation Twitter finds itself in: under attack by a hostile investor who’d like to see its board replaced.

Still, Proposal No. 4 isn’t a surefire thing. (Twitter wouldn’t comment for this story.) Twitter submitted an identical measure to shareholder vote last year, but even with the company advocating for it, it didn’t receive the required 80% vote threshold.

For now, Twitter has another defense against Musk. On Friday, it adopted a poison pill measure, which would allow it to sell deeply discounted stock to investors and reduce Musk’s control. But the pill could be discarded by a pro-Musk board, and Twitter lacks the other defense that other Big Tech companies have: a dual-share-class system, where multiple forms of equity keep power firmly with a company’s insiders. Meta, Alphabet and Snap all have versions of this system, guaranteeing that a Zuckerberg never has to worry about a Musk.

In the end, what Twitter did to earn goodwill with one assailing investor could seal its fate against another.