So I understand that Elon Musk wants to turn Twitter from a publicly held company to a private one. But what about the other 49% of shareholders? Are they required to sell their shares even if they don’t want to?
Yes, the minority shareholders are typically automatically bought out. I’ve held a few stocks over the years of companies that got privatized, and your brokerage will generally just close out the position and you get the cash in your account.
There are some types of investors who are able to maintain ownership in a company that has gone private, but there are limitations to how many investors an unlisted (i.e. private) company can have. That is one of the limitations that often leads private companies to go public, is they start to run into problems either bringing in new investors or disbursing shares to people they want to disburse shares to; in general a lot of really long term large private companies are closely held by families so keeping under the maximum number of shareholders isn’t too difficult.
It’s called a squeeze out. Many jurisdictions have special statutory provisions which allow the majority shareholder (not a simple majority - typically a resolution of the shareholders’ meeting with a very high supermajority, e.g. 90 %, is required) to compel minority shareholders to sell their shares for fair compensation. Obviously, opinions can differ as to what the fair compensation is, and this issue is prone to litigation.
As I recall from the times when this was common -
The bidder announces a takeover - hostile or not. They make a public offer for all shares. If they get a certain percentage (I don’t recall, I think it ranged from 60% to 80%, I don’t remember being as high as 90%) then the takeover was complete and all other shares were transferred at the bid price.
So if a sufficient percent agree to sell shares, then the takeover allows the buyer to automatically take the remaining shares at the agreed price. IIRC for the protection of small shareholders, the buyer is forbidden from making a sweetheart deal for a higher price for other owners. There are a number of laws to protect the minority shareholders.
(I.e. Joe’s Investment Fund Inc. owns 30% of shares, if I can get that in addition to the rest of what I can get on the market, the deal is assured. But the law says I cannot offer Joe a higher price than the small fish on the public stock market, and I cannot offer to buy shares just from a few large investors and ignore the small fry - I have to make the same offer, same amount to everyone… and then if I succeed, pay out the ones who refused to sell at that same price)
I believe too there was a limit - something like 10%, like Musk did with Twitter initially - when a single person buys more than that amount, they must declare their intentions publicly. Are they planning to slowly buy more? Are they planning to buy a majority stake (in which case the takeover rules apply)? the idea that someone could secretly amass close to a majority of shares in a public company - that’s illegal. So is several shareholders conspiring together to avoid the 10% limit by having multiple buyers each under the 10% limit. And obviously when a big shareholder announces only "I’m going for 20% ownership’ - not a takeover - that alone would drive up prices, so important for everyone to know.
Basically, for publicly traded companies, the SEC is saying “don’t play games with share prices” and “no sweetheart deals that screw the little guy.”
The purpose of compelling minority shareholders to sell their shares to a majority holder is primarily to permit a company to take itself private in the case of market devaluation to prevent it from being effectively bankrupted by becoming overleveraged in a run on its market capitalization. In other words, it is to protect a company from being exploited by people manipulating the market for their own gain. Of course, those regulations have more frequently come to be used by people to perform a hostile takeover in which a corporate raider buys up stock (often through intermediaries to conceal its intentions) and uses their majority position to force other shareholders to sell or acquiesce to forced sale of shareholders opposed to the takeover. The normal measures to oppose a hostile takeover weren’t used or effective in this case because Twitter’s valuation is a fantasy that nobody is willing to actually buy debt to secure and from which they don’t have much in the way of real assets or cash to sell or distribute as dividends.
Of course, Elon Musk violated the regulation regarding reporting of owning a more than 5% stake, manipulates share prices, and has “no regard for the SEC”. Since the SEC is a mostly toothless regulatory agency with little power beyond levying mostly notional fines, and unless the Department of Justice steps in under anti-trust statutes the sale will very likely go through despite the impact upon both Twitter and Tesla shareholders, the latter being very nervous about what using so much Tesla stock to leverage the purchase of Twitter might do if (and when) it is revealed that Twitter is not actually profitable.
Stranger