Meanwhile in cryptoHere’s a trade you can’t do: Find a small publicly traded bank. Say it’s a bank with $10 billion of assets, with an equity market capitalization of $1 billion. (These are realistic numbers; the market value of a bank’s stock will generally be much lower than the value of its assets, because most of those assets are in effect owed to its depositors. 8 ) Buy 51% of the stock for $510 million or whatever.  Vote out the board, vote in a new board and make yourself the chief executive officer. Take the $10 billion in the vault and send it to yourself, making $10 billion on your $510 million investment. Smirk “what, I own the bank, I take the money, that’s how it works.”That’s not how it works, you can’t do this, 9  if you did do it you would go to prison, but you’d be stopped well before that point. But in its outlines it is a tempting and elegant trade, and we have talked about variations that work a little better. (The guy we talked about did go to prison, though he did get the money first, so his version worked only a little better.) window.__bloomberg__.ads.enqueue("in-article-4-RAJT3KDWLU6A01"); {"contentId":"RAJT3KDWLU6A01","position":"in-article4","dimensions":{"mobile":[[5,19],[300,250],[3,3],[1,1],"fluid"]},"type":"In Article Flex Native Ad","positionIncrement":1,"targeting":{"position":"in-article4","positionIncrement":1,"url":"/opinion/articles/2022-04-18/twitter-has-a-poison-pill-now"},"containerId":"in-article-4-RAJT3KDWLU6A01"} window.__bloomberg__.ads.enqueue("desktop-in-article-8-RAJT3KDWLU6A01"); {"contentId":"RAJT3KDWLU6A01","position":"desktop-in-article8","dimensions":{"large_desktop":[[300,250],[5,4]],"small_desktop":[[300,250],[5,4]]},"type":"Desktop in article Native Ad","targeting":{"position":"desktop-in-article8","url":"/opinion/articles/2022-04-18/twitter-has-a-poison-pill-now"},"containerId":"desktop-in-article-8-RAJT3KDWLU6A01"} The basic idea of the trade is that there exist in the world some very large pots of money — banks, insurance companies, asset managers, etc. — that are controlled by relatively small companies. It takes a smaller amount of money to buy control of the company, and then you get to decide what to do with the larger pot of money that the company manages. In the world of traditional finance, this is a well-known problem, and those pots of money tend to be very carefully regulated to guard against some opportunist taking control of them on the cheap and draining the money from the pot.In crypto, etc. etc. etc. etc. etc. you know how this is gonna go. Here’s Anthony Lee Zhang on Twitter:Beanstalk, a moderately popular new algo-stable protocol, just got attacked for $80MThis one is a very interesting hack: rather than exploit a bug in the code, it was a "governance attack". My understanding is that holders of beanstalk equity token holders can vote on changes to the protocol: literally, chunks of code that are added to the protocolThe way an algo-stable works, there's an equity layer and a debt (stablecoins) layer, and possibly a bunch of reserves, so the equity layer effectively has control over a bunch of "stuff" that the protocol ownsHence, a fairly simple attack:1. Propose a piece of code to the protocol that says "send the entire treasury to my address A"2. Buy a bunch of equity tokens and vote the change in3. Send the entire treasury to your address AAnd here is CoinDesk’s summary:The attacker took out a flash loan on lending platform Aave which enabled them to amass a large amount of Beanstalk’s native governance token, Stalk. With the voting power granted by these Stalk tokens, the attacker was able to quickly pass a malicious governance proposal that drained all protocol funds into a private Ethereum wallet.Various crypto pots of money are controlled by governance tokens, and the market capitalization of the governance token is often a lot lower than the value in the pot, for basically the same reasons that the market capitalization of a bank is generally much lower than the value of the bank’s assets. And the governance token can, by majority vote, decide what to do with the pot. (Sometimes — many pots are better designed than this!) And in crypto, you can often do a series of transactions as a single integrated transaction, in which you take out a flash loan to buy all the governance tokens, vote the governance tokens to give yourself the pot of money, use some of the pot to repay the flash loan and keep the rest for yourself — all at once. And so someone did.  window.__bloomberg__.ads.enqueue("desktop-in-article-9-RAJT3KDWLU6A01"); {"contentId":"RAJT3KDWLU6A01","position":"desktop-in-article9","dimensions":{"large_desktop":[[300,250],[5,4]],"small_desktop":[[300,250],[5,4]]},"type":"Desktop in article Native Ad","targeting":{"position":"desktop-in-article9","url":"/opinion/articles/2022-04-18/twitter-has-a-poison-pill-now"},"containerId":"desktop-in-article-9-RAJT3KDWLU6A01"} Again: You could do exactly this trade with a bank, instead of a stablecoin, if banks were stupidly designed. But they are not!

Poison pillsHere are some things you could do 1 : Buy 51% of the stock of a public company in the open market over time, just buying whenever anyone sells, looking for any blocks of stock that come loose, paying the market price for each trade, etc. To put numbers on it, let’s say you start buying at around $40 per share and finish at around $50 per share. (Your buying, and the legally required disclosure of your ownership, will push up the price.) Once you have 51%, you take control, vote out the board, vote in your buddies, elect a new chief executive officer and run the company however you want. Buy 51% of the stock of a public company in a tender offer. A tender offer is just a big coordinated public offer to buy stock, open to all shareholders at the same price. You announce to all shareholders, “I want to buy 51% of this company and I’ll pay $50 per share in cash, but I won’t buy more than 51%.” More than 51% tender, you prorate the offer (not buying all the shares that are tendered), you get to exactly 51%, paying $50 per share. You proceed as above, taking control of the board etc. You acquire 51% of the company and take control of the board, as in either Thing 1 or Thing 2. Then you propose a merger at $30 per share. The new board — your buddies — agrees, and submits it to a shareholder vote. You vote your 51% of the shares in favor, and the merger happens; you acquire the remaining 49% of the stock at $30 per share. The holders of that 49% — who did not sell to you at $50 in the first step — are forced to sell to you at $30 in the second step. (That’s how mergers work: When the merger happens, the stock is automatically converted into whatever the merger consideration is, here $30 in cash.) Same as Thing 1, but instead of buying 51% you buy, I don’t know, 30%. At 30% you just need to convince a few other shareholders to vote with you to kick out the board, etc. As the biggest shareholder, you might have effective control even without a majority. Offer to buy 100% of the stock of the company in a tender offer. Announce to all shareholders, “I want to buy 100% of this company and I’ll pay $50 per share in cash. But let me warn you. If I get above 51%, but not to 100%, I will definitely do a second-step merger (as in Thing 3), and I’ll do it at $30 per share. So if you want $50, you better tender now, because if you don’t you’re getting $30.” Shareholders might think that $50 is too low, and might not want to tender. But they can’t be sure that 51% of the stock won’t tender, and they don’t want to be left out. So they tender for $50 to avoid getting stuck with $30. (This is called a “two-tier tender offer.”) Same as Thing 5 but you don’t make the threat explicit. “I want to buy 100% of this company and I’ll pay $50 per share in cash,” you say. But you have a reputation for being tough, and a history of treating minority shareholders poorly. The threat is implicit, so shareholders tender at $50 to avoid ending up in the minority of a company that you control.These are the things, the classic things. They are “coercive takeover tactics,” in the lingo. They are ways for someone — a “corporate raider,” in the lingo — to take over a company without paying a fair price for it, or without offering every shareholder the same price. Or, I mean, arguably without paying a fair price; you might think that some of these things are fine. (If you can get 51% of the shareholders of a company to sell you their stock in market transactions, what’s the problem?) But boards of directors of public companies generally take a dim view of these things. They think of themselves as fiduciaries for all of the shareholders, and they do not like the idea of someone buying the company out from under them.  window.__bloomberg__.ads.enqueue("outstream-video-1-RAJT3KDWLU6A01"); {"contentId":"RAJT3KDWLU6A01","position":"outstream","dimensions":{"large_desktop":[[300,250],[1,8]],"small_desktop":[[300,250],[1,8]],"tablet":[[300,250],[1,8]]},"strategy":"viewable","type":"Outstream Video Native Ad","targeting":{"position":"outstream","url":"/opinion/articles/2022-04-18/twitter-has-a-poison-pill-now"},"containerId":"outstream-video-1-RAJT3KDWLU6A01"} window.__bloomberg__.ads.enqueue("outstream-video-2-RAJT3KDWLU6A01"); {"contentId":"RAJT3KDWLU6A01","position":"outstream","dimensions":{"mobile":[[300,250],[1,8]]},"strategy":"viewable","type":"Outstream Video Native Ad","targeting":{"position":"outstream","url":"/opinion/articles/2022-04-18/twitter-has-a-poison-pill-now"},"containerId":"outstream-video-2-RAJT3KDWLU6A01"} Instead, the board of directors will prefer a nice tidy negotiation between the buyer and the board. The buyer comes to the board and offers a merger, and they negotiate the terms with each other. If the board agrees to a deal, it will generally involve the buyer paying the same price to every shareholder, and it will be a price that the board thinks reflects the full value of the company. Once the buyer has an agreement with the board, they will go out together, buyer and board, and seek shareholder approval. (Either by signing a merger agreement and submitting it to a shareholder vote, or by doing a tender offer in which the buyer asks to buy all the shares from shareholders directly, but on terms approved by the board.) If the board does not agree to the deal, the buyer goes away peacefully and does not cause trouble by buying more stock, launching a tender offer to shareholders without board approval, or running a proxy fight in which the buyer tries to replace the board with its own nominees. That is the dignified, controlled way that corporate boards generally prefer to do mergers-and-acquisitions negotiations. window.__bloomberg__.ads.enqueue("box-usSmgiD"); {"contentId":"RAJT3KDWLU6A01","position":"box","dimensions":{"mobile":[[300,250],[3,3],[1,1],"fluid"]},"type":"Mobile Body Box Ad","positionIncrement":1,"targeting":{"position":"box1","positionIncrement":1,"url":"/opinion/articles/2022-04-18/twitter-has-a-poison-pill-now"},"containerId":"box-usSmgiD"} Many buyers like to do M&A this way too. (If you are taking over a company, it helps to be friendly with the people running the company! You’ll need them to help you run the company!) But some buyers — the corporate raiders, etc. — like to retain the ability to go hostile, to do unsolicited tender offers or proxy fights if the board rejects their offers. For one thing, sometimes boards are unreasonable, and going directly to the shareholders is the only way to get a deal done. For another thing, the threat of going hostile can be helpful in negotiations with the board.In the U.S., the board has a powerful tool in this fight. It is the poison pill. (Everyone calls it that, though its technical legal name is a “shareholder rights plan.”) The board of directors of a company, feeling threatened by a big acquirer of its stock or a corporate raider proposing to buy the company, will adopt a “shareholder rights plan.” The gist of the plan is that if anyone — meaning, basically, the buyer — acquires more than X% of the company’s stock (often X is 15 or 20), then that person’s shares go poof. You can’t actually do that — you can’t make one shareholder’s shares go poof — but you can get arbitrarily close by allowing all of the other shareholders of the company to buy many more shares at a discount, or by giving them more shares for free. So you say “if anyone goes above 15% of the stock, then we will distribute one free share of stock for each existing share, except that the person who went above 15% doesn’t get any of the free stock.” So if someone gets 15%, then everyone else’s shares get doubled, taking the acquirer down to about 8%. 2 (In theory you could do this repeatedly, so that the acquirer could never get a controlling stake.) window.__bloomberg__.ads.enqueue("desktop-in-article-1-RAJT3KDWLU6A01"); {"contentId":"RAJT3KDWLU6A01","position":"desktop-in-article1","dimensions":{"large_desktop":[[300,250],[5,4]],"small_desktop":[[300,250],[5,4]]},"type":"Desktop in article Native Ad","targeting":{"position":"desktop-in-article1","url":"/opinion/articles/2022-04-18/twitter-has-a-poison-pill-now"},"containerId":"desktop-in-article-1-RAJT3KDWLU6A01"} The actual mechanics are a bit more complicated than that, but not worth worrying about 3 ; even the summary in the previous paragraph is not worth worrying about. The point is that the pill makes it very bad for anyone to get above 15% of the stock — it basically makes their stock go poof — so nobody does. For a long time it was common to say that a poison pill had never been triggered; that is not quite true anymore, but it is still close enough. When a board adopts a poison pill, for all practical purposes that prevents a buyer from buying more than 15% of the stock, either in the open market or in a tender offer. So it forces the buyer to negotiate with the board. If the buyer wants to buy the company, it has to strike a deal with the board (which will then get rid of the pill); it can’t just go directly to the shareholders to buy stock, because the pill will make its shares go poof.(Some disclosure: The poison pill was invented by the law firm of Wachtell, Lipton, Rosen & Katz, where I worked briefly in the mid-2000s. In my discussion of takeover defenses and tactics, I am drawing on Wachtell’s “Takeover Law and Practice” guide, which is worth reading if you want more detail on how this all works. But I worked there a long time ago and any errors or oversimplifications here are not the firm’s fault.)The poison pill is a bizarre and drastic thing for a board to do — to make one shareholder’s stock go poof! — and when it was invented in the 1980s there was some skepticism that it was legal. But the Delaware Supreme Court approved it, in a 1985 decision, noting that the board’s reason for “the adoption of the Rights Plan was in reaction to what it perceived to be the threat in the market place of coercive two-tier tender offers” (my Thing 5 above). Basically the idea was that (1) corporate raiders sometimes do bad coercive things to take over companies, (2) boards have a fiduciary duty to stop them and (3) drastic measures, like the poison pill, are justified to stop coercive takeover tactics. window.__bloomberg__.ads.enqueue("in-article-1-RAJT3KDWLU6A01"); {"contentId":"RAJT3KDWLU6A01","position":"in-article1","dimensions":{"mobile":[[5,19],[300,250],[3,3],[1,1],"fluid"],"tablet":[[5,11],[728,90],[1,1]]},"type":"In Article Flex Native Ad","positionIncrement":1,"targeting":{"position":"in-article1","positionIncrement":1,"url":"/opinion/articles/2022-04-18/twitter-has-a-poison-pill-now"},"containerId":"in-article-1-RAJT3KDWLU6A01"} But the pill quickly became a standard feature of corporate defense even against not-very-coercive actions. Boards of directors have successfully used poison pills to block non-coercive, all-shares-at-the-same-price tender offers, and to put limits on activists’ ability to run proxy fights. The broad general rule is that the board gets to decide on takeovers, and that if it acts in good faith to prevent a change of control, it can, even if shareholders would prefer to take the money.