EXPLAINER: What Twitter's 'poison pill' is supposed to do

Twitter is trying to thwart billionaire Elon Musk's takeover attempt with a “poison pill" — a financial device that companies have been wielding against unwelcome suitors for decades.

WHAT ARE POISON PILLS SUPPOSED TO DO?

The ingredients of each poison pill vary, but they're all designed to give corporate boards an option to flood the market with so much newly created stock that a takeover becomes prohibitively expensive. The strategy was popularized back in the 1980s when publicly held companies were being stalked by corporate raiders such as Carl Icahn — now more frequently described as “activist investors."

Twitter didn't disclose the details of its poison pill Friday, but said it would provide more information in a forthcoming filing with the Securities and Exchange Commission, which the company delayed because public markets were closed Friday.

The San Francisco company's plan will be triggered if a shareholder accumulates a stake of 15% or more. Musk, best known as CEO of electric car maker Tesla, currently holds a roughly 9% stake.

CAN A POISON PILL BE A NEGOTIATING PLOY?

Although they are supposed to help prevent an unsolicited takeover, poison pills also often open the door to further negotiations that can force a bidder to sweeten the deal. If a higher price makes sense to the board, a poison pill can simply be cast aside along with the acrimony it provoked, clearing the way for a sale to completed.

True to form, Twitter left its door open by emphasizing that its poison pill won't prevent its board from “engaging with parties or accepting an acquisition proposal" at a higher price.

Adopting a poison pill also frequently results in lawsuits alleging that a corporate board and management team is using the tactic to keep their jobs against the best interests...