Elon Musk Should Have Been Stopped Long Before He Came for Twitter

Is Elon Musk serious about buying Twitter? Given his track record for trolling and half-baked provocations, I doubt it.

Dubious offers happen, but CEOs of public companies with multibillion-dollar market caps don’t typically propose them. Musk often uses Twitter to deflect attention from serious negative news about him and his companies and now he says he wants to own the social megaphone. I think Musk’s tender offer to buy Twitter will fall apart because everyone, including government regulators, should be on to his games.

Twitter, as we know, adopted a poison pill defense against Musk on April 15. The move makes it nearly impossible for him to buy enough Twitter shares on his own to gain control. Musk could try to fight it in court, but “no court has overturned a poison pill in the last 30 years,” according to Columbia University law professor John C. Coffee Jr.

Even so, Musk would have a much harder time making a pitch for Twitter if the U.S. Securities and Exchange Commission had properly sidelined him the last time he attempted such antics. When the SEC settled with Musk in 2018 for casually tweeting about taking Tesla private at $420, the commission ordered him to step down as Tesla’s chairman but allowed him to continue as CEO. Musk continued to be Tesla’s largest shareholder, with approximately 21.7% of Tesla’s outstanding shares at that time.

Former SEC Chairman Jay Clayton said Musk’s penalty “reaffirms an important principle embodied in our disclosure-based federal securities laws. Specifically, when companies and corporate insiders make statements, they must act responsibly, including endeavoring to ensure the statements are not false or misleading and do not omit information a reasonable investor would consider important in making an investment decision.”

After the settlement, Musk’s ownership share grew — to 23.1% by the end of June 2021, according to Tesla’s proxy. If the SEC had barred him from the CEO job he’d perhaps own fewer Tesla shares that he could use as collateral for a Twitter takeover. Musk was able to exercise a significant portion of vested stock options in the last half of 2021 as Tesla CEO, reaping billions in profits. He later sold enough to bring his ownership percentage down to about 17% by the end of the year. When he exercises the rest of the stock options he’s been awarded since 2018, he could bring the percentage ownership back up to nearly 24%.

Missed opportunities

The SEC should have also barred Musk from serving as an officer or director of any public company, a so-called D&O bar, back in 2018. Since financial penalties have minimal impact on multi-billionaires, in its original complaint the SEC originally sought a full D&O bar against Musk. The agency does so in more than 70% of its cases involving individual defendants. In the end, Musk’s lawyers helped him avoid that penalty, and regulators relented, perhaps because of Musk’s unusually close association with Tesla.

If regulators had taken those punitive steps, Musk’s options for acquiring another public company like Twitter would be severely limited. Afterall, waging a proxy fight–one that starts with Musk taking a board seat and then gaining control by winning friends and influencing other board members who then vote him Ruler for Life–doesn’t seem to be his style. In fact, he quickly changed his mind about taking a Twitter board seat when it was offered.

When Musk settled with the SEC in August 2018 over his unserious bid to take Tesla private, more than 22 million people, including journalists and media organizations, followed him on Twitter. Since then, his cult of personality has exploded. He now has more than 82 million Twitter followers and continues to bypass traditional media channels by obsessively tweeting to defend himself or clap back at perceived enemies like the SEC, journalists, and Tesla whistleblowers. News coverage of Musk, his companies, and his crypto investments, is now primarily driven by his tweets.

Because the SEC, and Department of Justice, didn’t stifle Musk’s shenanigans when they had the chance, he’s been free as a bird to tweet long and loud about whatever multi-billion dollar deal he’s hatching up. The lax penalties meant that he never stopped tweeting dismissively about government regulators, the settlement, and its constraints. He repeatedly risks contempt charges over his disputes with the SEC over those 2018 tweets. Musk’s lawyer even accused the SEC of harassing his client with repeated enforcement activity since the SEC’s sanctions, according to this Tesla filing.

Causes for concern

According to the Wall Street Journal, the DOJ and SEC are now investigating stock sales by Elon Musk and his brother Kimbal, who serves on the Tesla board. The investigation was again prompted by a Musk tweet. The day before brother Elon tweeted a poll asking whether he should sell 10% of his holdings Kimbal Musk sold $108 million of his own shares. Musk also began selling shortly after the tweet.

Those investigations come amid other legal problems for Musk and his companies, including a judgment of racial discrimination requiring Tesla to pay $15 million to a former contractor, a California lawsuit alleging discrimination at a Tesla factory, and a Department of Justice investigation at SpaceX over alleged discriminatory hiring practices.

Even some deals that Musk has fully consummated haven’t gone well. With Tesla’s 2016 acquisition of Solar City, analysts didn’t see a strategic or business rationale at the time. Shareholders also objected to what they believed was a non-arm’s length transaction mired in the appearance of conflicts of interest because the two companies were entangled at a personal and business level for Musk. Shareholders eventually sued, claiming Musk coerced the company’s board into the deal. They asked a Delaware court to order Musk to pay Tesla $13 billion in damages. A decision in the case is due soon.

In his Twitter bid Musk repeats his 2018 intention “to retain as many shareholders as is allowed by the law in a private company”. How was he going to do that for Tesla? A “special purpose fund” would enable any shareholder to retain its Tesla investment. Ann Lipton, a law professor at Tulane University wrote in 2018 that wouldn’t work and nothing has changed since.

Word on the street

Twitter investor sentiment is on a roller coaster, up and down with each new Musk tweet or announcement in the last two weeks. Twitter’s stock jumped up over $50 with news of Musk’s initial 9.1% stake and then fell back to $45.08 on April 14, closing significantly below Musk’s offer of $54.20 a share before the extended holiday weekend. Twitter opened slightly higher at the start of this week but still nearly 15% below Musk’s bid. By midday Tuesday it was sinking again with ongoing doubts about Musk’s funding and the news that several private equity firms were contemplating a stake, but most as a “white knight” to rescue Twitter from Musk.

Twitter users, what Musk has referred to as a “de facto town square”, are arguably an important arbiter of the viability of the deal. Sentiment analysis using Google Trends, Brand24, and Social Search on the key dates of the Twitter acquisition campaign, shows the “de facto town square” doesn’t believe Musk either. Negative sentiment overtook positive on April 9 when Musk decided not to join the Twitter board and then spiked dramatically negative on April 14 when he admitted he was not sure he’ll “actually be able to acquire it.”

Dennis Howlett, a Twitter early adopter and retired co-founder of Diginomica, is fed up. “The SEC needs to rein in this man’s child-like behavior. His actions have made Twitter toxic. No right-minded investor would try to buy it now.”

As for me, I agree with historian and culture critic Ruth Ben-Ghiat, who said in a recent interview that there’s only one way to stop a personality cult that repeatedly ignores the rule of law. “It takes prosecution and conviction to deflate their personality cults.”