That’s not the way it works. So of course it sounds illegal because you’ve made up an illegal scenario.
When the board triggers this clause, they may sell shares to existing shareholders at a discount. These are new shares. Companies have every right to sell shares outside of the exchange they’re listed on… and they do that all the time, through employee grants or options, for example.
When raising funds they generally sell new shares on the exchange, because that’s the highest price they can obtain for the share.. but they don’t have to do that.
And yes, in case you didn’t know, companies can sell as many shares as they want.
There must be some expectation about the rate of share issuance, I think that's what the parent comment is getting at. ESOP pools are well understood (and IIRC defined upfront). Threatening to sell massively discounted shares equivalent to existing shares without even so much as an SEC filing about it (as of a few hours ago), that's the part where it becomes questionable for me. If the new shares are marketable, then this is a defensive measure that actively destroys value for all existing shareholders.
A company cannot issue unlimited shares without concern for existing shareholders - taken to the extreme, doing so reduces the value of all holdings to zero.
Why doesn’t the board just issues shares to existing holders whenever Elon goes over 15%? You effectively dilute Elon out of getting over the 15%? It seems like the only difference with the poison pill is that you have to pay a discounted rate instead of getting new shares for free. But if the company can issues discounted shares to prevent a takeover why don’t they just issue free shares to prevent a takeover?
For example, if Elon goes to 16% ownership why doesn’t the board just distribute new shares to existing owners pro-rata to the point where Elon is back to 15%?
All of this seems pretty sketchy to me. I don’t see how the board is legally allowed to do this.
A company can't pay a dividend to some shareholders but not others. This action would effectively be giving in-the-money call options to some shareholders but not others. Probably legal, but pretty dodgy.
Thanks for the links. Goodness what a mess of a precedent.
Having the board ignore a large shareholder would be one thing. Shares give votes, and terms don't turn over every day, and we don't kick out politicians as soon as the polls turn sour on them. Fine. But if a shareholder has enough shares to change the board composition (or just threatens to) the incumbents can just unilaterally decide that the challenger owns a smaller fraction of the company than they bought on the open market? Maybe it's not technically self-dealing, but it's bad.
When the board triggers this clause, they may sell shares to existing shareholders at a discount. These are new shares. Companies have every right to sell shares outside of the exchange they’re listed on… and they do that all the time, through employee grants or options, for example.
When raising funds they generally sell new shares on the exchange, because that’s the highest price they can obtain for the share.. but they don’t have to do that.
And yes, in case you didn’t know, companies can sell as many shares as they want.