Why it matters: Twitter will appoint Elon Musk to its board of directors. The move comes after the Tesla CEO spent $2.89 billion to acquire a 9.2-percent stake in the company. Typically a passive stake is when the holder does not intend to influence the company. However, Musk's recent Twitter activity indicates that he wants to see changes.
In March, Musk criticized Twitter's stance on free speech. In a poll, he asked followers if Twitter "rigorously adheres" to the principles outlined in the First Amendment. Seventy percent responded, "No." He followed up by asking what should be done about it.
Following Monday's 13G filing with the SEC, Musk polled followers again, asking if Twitter should have an edit button, purposefully misspelling "yes" as "yse" and "no" as "on." So far, 73 percent think they should be able to edit their tweets. He also said that he looks forward to making "significant improvements" to the platform after Twitter announced his appointment.
Looking forward to working with Parag & Twitter board to make significant improvements to Twitter in coming months!— Elon Musk (@elonmusk) April 5, 2022
So regardless of Musk's passive 13G filing, it seems clear that he would like to affect change in the online "town hall." However, there may be more to it than just giving Musk a voice. Twitter may have seen his large purchase as a threat of a hostile takeover. According to the SEC filing, Musk will be limited from acquiring controlling interest in the company.
"The Company will appoint Mr. Musk to the Company's Board of Directors (the "Board") to serve as a Class II director with a term expiring at the Company's 2024 Annual Meeting of Stockholders," reads the SEC Form 8-K. "For so long as Mr. Musk is serving on the Board and for 90 days thereafter, Mr. Musk will not, either alone or as a member of a group, become the beneficial owner of more than 14.9% of the Company's common stock outstanding at such time, including for these purposes economic exposure through derivative securities, swaps, or hedging transactions."
I'm really happy Elon is joining the Twitter board! He cares deeply about our world and Twitter's role in it.— jack⚡️ (@jack) April 5, 2022
Parag and Elon both lead with their hearts, and they will be an incredible team. https://t.co/T4rWEJFAes
The 14.9-percent stake mentioned is significant because, with 15-percent beneficial ownership, Musk could issue a tender offer. A tender offer is when a shareholder has a majority stake in the company and offers shareholders a premium price on their holdings. This tactic is one way an individual or group can execute a hostile takeover.
So although he has never indicated that he wants to buyout Twitter, management would rather give him a seat on the board and some influence than allow that chance — at least for now. Founder and former CEO Jack Dorsey and current CEO Parag Agrawal tweeted their approval of Musk's appointment.
In the meantime, Musk will have to deal with the SEC. Under SEC regulations, investors must report any purchase over 5 percent within 10 days. According to CNBC, Musk acquired the shares on March 14, but he didn't file the 13G until April 5. However, the billionaire is likely to settle the matter quickly. Penalties for this type of violation only tend to be around $100,000 — nothing that will significantly hurt Musk.