Yesterday
I suggested that Elon Musk, Twitter’s new largest shareholder, should join the board of directors and live-tweet the board meetings. Today
Twitter announced that Musk is in fact joining the board, and I feel like it’s going to be so much worse than live-tweeting the board meetings? It’s going to be:
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- Musk thinks of a way to make Twitter more annoying (the edit button, more “free speech,” somehow more Dogecoin integration, etc.).
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- Musk conducts a Twitter poll asking if Twitter should do the thing.
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- “Yes, be more annoying” wins in a landslide; how could it not.
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- Musk shows up at the board meeting to be like “see, our users want this annoying thing.”
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- Also he owns the most shares.
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- The board does the annoying thing.
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- Emboldened, Musk returns to Step 1.
I also joked yesterday that Musk would be the first Twitter user ever to join the board. That is not literally true, but it does
feel true. My basic model of how Twitter works is that everyone who works at Twitter hates the product and its users, which
creates a healthy tension. Twitter’s users push Twitter to be more Twitter-like, to appeal to the weirdest and most addicted tendencies of its most online power users. But Twitter’s employees and executives push it to be less Twitter-like, because they don’t use it, and it ends up being just about Twitter-like enough. If you put Twitter’s most addicted users in charge, it would be an unusable nightmare of harassment and weirdness. Twitter’s very most addicted user is now in charge.
What else, what else. Is Musk “in charge” of Twitter? He is just one of 12 board members.
2 He’s the largest shareholder, but with 9.2% of the stock he’s not really a controlling shareholder. As part of his deal to join the board, he
signed a standstill agreement promising not to acquire more than 14.9% of the stock, so he can’t threaten a hostile takeover if he doesn’t get his way on the board. The company is run by a CEO and executives who were not appointed by Musk and do not report directly to him.
On the other hand, Musk is surely Twitter’s noisiest board member. He
is the biggest shareholder. Since Donald Trump was kicked off Twitter, Musk is arguably its most important
user. He has tweeted memes comparing Twitter’s CEO, Parag Agrawal,
to Stalin. (“This could be setting up for another leadership change,”
Cathie Wood said of Musk’s stake.) And he’s gonna show up at board meetings with those polls. It is hard not to conclude that he will have an outsized influence on the board, that he will not be especially deferential to Agrawal’s vision, and that Twitter might shift its strategy in some way — possibly toward less moderation of misinformation and abuse — because of his presence. “Looking forward to working with Parag & Twitter board to make significant improvements to Twitter in coming months,”
he tweeted today.
As we discussed yesterday, Musk disclosed his 9.2% stake in Twitter on Schedule 13G, which is traditionally used by passive investors. You are not allowed to file a 13G — you have to file the more detailed and informative Schedule 13D —
if you have “acquired the securities with any purpose, or with the effect, of changing or influencing the control of the issuer.” Did Musk acquire his Twitter stock with the purpose of influencing the control of Twitter?
I don’t know? I think it is quite obvious that if you acquire 9.2% of the stock, file a 13G, and immediately launch a proxy fight to replace the CEO and board of directors, you have broken the rules. It is fairly obvious that if you acquire 9.2% of the stock, file a 13G, and go to the company saying “I own 9.2% and will launch a proxy fight unless you appoint me to your board of directors,” you have also broken the rules. If you acquire 9.2% of the stock, file a 13G, tweet some ominous polls, cook up various schemes to tweak the product, have
some basically polite chats with the CEO and get appointed to the board, have you broken the rules? I think that you have not clearly broken the letter of the rules.
3 Nonetheless I think that the SEC’s Elon Musk Division is going to be annoyed. Passive investors aren’t usually asked to sign standstills promising not to buy more stock.
There is also a
timing point that they might find annoying. I don’t know when Elon Musk bought his 9.2% stake in Twitter, or how, or even what he actually bought. (Maybe it’s at-the-money physically settled call options?) If he had filed a Schedule 13D I would know, because
Schedule 13D requires a description of “any transactions in the class of securities reported on that were effected during the past sixty days” as well as “the amount of funds or other consideration used or to be used in making the purchases”;
Schedule 13G does not.
But
Musk’s 13G does say on the cover that the “Date of Event which Requires Filing of this Statement” was March 14, 2022, and the 13G was filed yesterday, April 4. The
13G rules require a filing within 10 calendar days after you acquire 5% of the stock.
4 If March 14 is when Musk hit 5% —
the most intuitive reading — then he was about 11 days late. You could imagine some other reading — maybe he
started buying on March 14 and hit 5% later? — but this seems unlikely just because he bought
so much stock. In March, Twitter traded a
total of about 428.8 million shares of stock (287 million since March 14) according to Bloomberg data; Musk announced yesterday that he owns 73.5 million of them. If he bought all of them since March 14, he was buying more than 25% of each day’s volume, an improbably fast clip. Even if he hit 5% on March 14 and bought the remaining 4.2% over the rest of March, he was buying 11.6% of volume every day
after hitting 5%.
If Musk
did file the 13G late, so what? Well,
here is a CNBC article that assumes he was late and notes that “SEC disclosure punishments are historically modest — often about $100,000.”
But it is worth saying that this particular thing is something that SEC Chair Gary Gensler cares about. I have
quoted him before, complaining that activists get too long to disclose their stakes and suggesting that it is almost a kind of insider trading:
“It’s material nonpublic information that there’s an activist acquiring stock, who has an intent to influence and generally speaking, there’s a pop if you look at the economics from the day they announced … there’s usually a pop in the stock at least single-digit percent,” Gensler said. “So the selling shareholders during those days don’t have some material information.”
And Gensler’s SEC has proposed new rules, based on that reasoning, to require faster disclosure by activists. Those rules are not yet in force, and I have criticized both
the rules and
Gensler’s theory of “information asymmetry.”
In general, I think that investors should have a right to act on
their own plans; I don’t think it’s illegitimate for an activist to know that she’s buying stock even though the market doesn’t.
But there are rules! If you buy more than 5% of a company, you have to disclose that within 10 days. And when you disclose that the stock often goes up. For instance Musk disclosed his stake yesterday morning, and the stock closed up 27%. If he disclosed his stake
late, and if he was
buying more stock during that delay, then that seems … bad?
I would not exactly call it “almost insider trading,” but I have a feeling that
Gary Gensler might, and I bet the head of the SEC’s Elon Musk Division would too. Like, the reasoning would be something like: “It is material nonpublic information that Musk was acquiring stock, and there was a huge pop when he announced, and because he was
legally required to make that information public and didn’t, he should have to give up his ill-gotten gains.” The stock traded mostly in the high $30s last week, and closed yesterday at $49.97; arguably the right penalty for a late filing would be paying back about $10 for each share — possibly millions of shares? — that he bought after the deadline.
The fact that Musk was also
having conversations with Twitter’s CEO about joining the board, before filing his 13G, and perhaps while buying stock, might also raise some concerns.
I want to be clear that I am entirely speculating here and I have no idea how many shares Musk bought when. All I am saying is that the SEC’s Elon Musk Division will be keenly interested in finding out.
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