Now that Elon Musk has decided that he doesn’t want to buy Twitter Inc. after all, he can’t just walk away from the $44 billion contract. Tesla Inc.’s billionaire cofounder will have to present his case to a Delaware judge. If history is a guide, his job won’t be easy.
Bret Taylor, Twitter chairman, vowed Friday that his social media platform would fight the Delaware Court of Chancery for Musk’s compliance. The company has already filed a lawsuit. Bloomberg has been told by people familiar that a filing may be made as soon this week.
Musk may be ordered to pay Twitter shareholders $54.20 per share by the judge if the judge decides against him. This is the same amount he stated he would do in his April 25 agreement. A ruling in his favor would let Musk walk, though he’d probably have to pay a break-up fee, initially set at $1 billion. There’s also the prospect that both sides reach a settlement whereby Musk still makes the acquisition, potentially at a lower price.
In this case, the judge will be focusing on the complexity of the 73 page purchase agreement. The court has never sided with parties like Musk who want to cancel acquisition commitments.
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Musk’s rationale centers on automated user accounts known as bots and how Twitter accounts for them. He alleges that the social media platform is teeming with spam bots, disputing Twitter’s contention that they make up less than 5% of total users. Musk said in his Friday filing with the US Securities and Exchange Commission that Twitter’s failure to properly hand over specifics on the number of bots amounts to what’s known as a “company material adverse effect [MAE]” A judge must decide whether such an event has occurred and whether it justifies Musk’s cancellation.
Larry Hamermesh, a University of Pennsylvania law professor who specializes in Delaware corporate law disputes, describes an MAE as an “unexpected, fundamental, permanent” negative development — akin to blowing a hole in the transaction that can’t be fixed.
So far, Delaware courts have found only one case in which a clear MAE emerged — Fresenius SE’s $4.3 billion buyout bid in 2018 for rival drugmaker Akorn Inc. A judge blessed Fresenius’ decision to walk away from the deal after finding Akorn executives hid an array of problems that cast doubt on the validity of data backing up approval for some drugs and profitability of its operations.
Concerns over bot accounts can cloud a deal
The agreement also gives Twitter officials so-called specific-performance rights, which means that if the judge finds Musk’s complaints about the bots data don’t rise to the level of an MAE, the platform can demand that the judge force Musk to consummate the buyout.
Musk’s decision to sign the deal without doing due diligence could work against him, said Robert Profusek, head of the mergers and acquisitions department at law firm Jones Day. “His lawyers’ argument that you don’t do diligence and test things out later simply isn’t the way things work in big ticket M&A and, if accepted, would put shareholders at risk,” he said in an interview.
Delaware chancery court judges are known for their expertise in interpreting what may look and sound to the layperson as a maze of legal jargon that seeks to delineate both sides’ rights and responsibilities in a merger and acquisition accord.
In the Twitter deal, the platform’s executives are obligated to promptly furnish Musk with “all information concerning the business, properties and personnel of the company and its subsidiaries as may reasonably be requested.” Musk contends management hasn’t met those duties in connection with the details of spam and bot accounts.
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Twitter stated that they have provided extensive user data. The company’s executives told the media that it manually examines thousands of accounts each quarter in order calculate its spam bot count. They also stated that they believe that the real number is far lower than what was disclosed in filings. To determine if an account was run by humans, the company relies on internal data such as phone numbers and Internet Protocol addresses.
The agreement also defines a “company material adverse effect,” as “any change, event, effect or circumstance which, individually or in the aggregate, has resulted in or would reasonably be expected to result in a material adverse effect on the business, financial condition or results of operations of the company and its subsidiaries.”
Marcio Jose Sanchez/AP Photo
It is possible that both parties will reach an outside-of-court agreement. Musk’s effort to pull the plug on the deal is probably nothing more than a negotiating ploy, said Charles Elson, a retired University of Delaware professor and former head of the school’s Weinberg Center for Corporate Governance.
“This is not a material adverse change,” Elson said. “That’s just a negotiating position. He knows the Delaware courts are extremely reluctant to find something like that in these deals.”
To press its case, Twitter has hired merger law heavyweight Wachtell, Lipton, Rosen & Katz. Twitter has hired Wachtell to gain access to Leo Strine (formerly Chancellor of Delaware Chancery Court) and Bill Savitt (Merger Law Expert). According to people familiar with the matter, Wachtell hopes to file suit by early next week.
Musk has brought in Quinn Emanuel Urquhart & Sullivan. This firm was instrumental in Musk’s successful defense of a defamation case in 2019. They are representing Musk in an ongoing shareholder lawsuit arising from his unsuccessful attempt to privatize Tesla in 2018.
The morale of Twitter employees is low
No matter what the legal outcome, many Twitter employees in San Francisco are unhappy, according to people close to or at the company. Many employees are unhappy with the lack of vision and leadership at the top in the light of the possible sale. Parag Agrawal is the Chief Executive Officer.
Both of the possible outcomes are not appealing to many Twitter workers. If Twitter is successful in court, Twitter will continue to be managed by an unpredictably and unwilling owner while struggling to reach ambitious growth targets. And should Musk succeed in ending the deal, Twitter stock will likely plummet, and a staff already dejected by Musk’s months-long public criticism of the site will suffer another emotional blow.
Several people have left or are planning to leave because they simply don’t want to work for Musk, the people said. For some, the decision to depart was cemented after a June question-and-answer session during which Musk, who showed up late, told employees that only those who were “exceptional” would be allowed to continue working from home.
—With assistance from Katie Roof
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