from the musk-has-no-poker-face dept
In news that is not surprising at all, and seems to be playing out just as people predicted a month ago, Elon Musk has officially claimed that Twitter is in breach of its merger agreement and says he’s pulling out of the deal. The actual details, of course, are not that simple. There is no actual escape hatch like that here. Musk made a legal agreement to pay $44 billion for the company and can’t just walk away.
As we noted back in June, he appeared to have hired some very expensive lawyers to come up with some sort of pretext for walking away, and it’s playing out exactly in the manner described. Musk had specifically waived his rights to due diligence prior to the deal, but the merger agreement did include a promise to provide Musk with necessary data to conclude the deal.
For much of the month of May, Musk (who must be a terrible fucking poker player) telegraphed his intentions to bail on the deal by whining about how much spam there was. This made no sense at any level. First, when Musk announced the deal, he insisted he was doing it in order to tackle the spam challenge on the platform (a problem that really doesn’t impact most users of the site — but does impact the very most high profile users like Musk). So to then suddenly start whining about spam seems transparently a pretext.
Also, it was a pretext that couldn’t void the deal.
So, his second attempt to come up with an excuse was to claim that Twitter publicly lied to the SEC in its filings regarding how much spam was counted among its monetizable daily active users. This also seemed ridiculous, as Twitter had been publicly reporting those numbers for quite some time, and Musk could have explored those prior to the deal itself but, again, deliberately chose to waive those rights. You can’t do a deal in which you agree not to explore the data, and then complain that you hadn’t seen the data.
Somewhere around this time, it seems clear that Musk’s lawyers explained to him that this wouldn’t get them out of the deal, and (it seems likely) suggested that they could cook up some alternative pretext that at least someone could try to actually argue in court — because it was clear that court is where this would all end up.
And thus, behold the bullshit brilliance of the lawyers at Skadden, Arps, who earned their large paycheck by zeroing in on the part of the deal about needing to supply Musk with the information necessary to close the deal. They just started requesting tons of data, specifically related to the whole spam/mDAU discussion, knowing that they could just keep asking for more data, some of it impossible to actually supply to Musk, and eventually they would be able to say that Twitter wasn’t supplying the data requested, and thus was in breach… and therefore the deal was off.
And, that’s exactly what happened. From the letter to Twitter:
Notwithstanding these repeated requests over the past two months, Twitter has still failed to provide much of the data and information responsive to Mr. Musk’s repeated requests, including, but not limited to:
- Information related to Twitter’s process for auditing the inclusion of spam and fake accounts in mDAU. Twitter has still not provided much of the information specifically requested by Mr. Musk in Sections 1.01-1.03 of the May 19 diligence request list that is necessary for him to make an assessment of the prevalence of false or spam accounts on its website. As recently as the June 29 Letter, Mr. Musk reiterated this long-standing request for information related to Twitter’s sampling process for detecting fake accounts. The June 29 Letter identified specific data necessary to enable Mr. Musk to independently verify Twitter’s representations regarding the number of mDAU on its platform—including, but not limited to (1) daily global mDAU data since October 1, 2020; (2) information regarding the sampling population for mDAU, including whether the mDAU population used for auditing spam and false accounts is the same mDAU population used for quarterly reporting; (3) outputs of each step of the sampling process for each day during the weeks of January 30, 2022 and June 19, 2022; (4) documentation or other guidance provided to contractor agents used for auditing mDAU samples; (5) information regarding the user interface of Twitter’s ADAP tool and any internal tools used by the contractor agents; and (6) mDAU audit sampling information, including anonymized information identifying the contractor agents and Quality Analyst that reviewed each sampled account, the designation given by each contractor agent and Quality Analyst, and the current status of any accounts labelled “compromised.” A subsequent request along these lines should not have been necessary, as this information should have been provided in response to Mr. Musk’s original diligence request. Yet, to date, Twitter has not provided any of this information.
- Information related to Twitter’s process for identifying and suspending spam and fake accounts. In addition to information regarding Twitter’s mDAU audits, the June 29 Letter also reiterated requests for data specifically identified in Sections 1.04-1.05 of the May 19 diligence request list regarding Twitter’s methodology and performance data relating to identification and suspension of spam and false accounts, including, but not limited to, information regarding account suspensions, including information sufficient to identify daily numbers of account suspensions since October 2020 and numbers of account suspensions for each of Twitter’s internal reasons for suspension. In addition, during the June 30, 2022 call, Twitter’s representatives indicated for the first time that the workflow and processes for detecting spam and false accounts in the mDAU population is different and separate from the workflow and processes for identifying and suspending accounts in violation of Twitter’s policies. On that call, Twitter indicated that it would not be willing to provide information regarding the methodologies employed to identify and suspend such accounts.
- Daily measures of mDAU for the past eight (8) quarters. On June 17, 2022 (the “June 17 Letter”) Mr. Musk reiterated his request for “access to the sample set used and calculations performed, as well as any related reports or analysis, to support Twitter’s representation that fewer than 5% of its mDAUs are false or spam account.” To that end, Mr. Musk requested that Twitter provide “daily measures of mDAU for the previous eight quarters, and through the present.” This information is derivative of the information Mr. Musk first sought in Sections 1.01-1.03 of the May 19 diligence request list. Although Twitter has provided certain summary data regarding the mDAU calculations, Twitter has not provided the complete daily measures as requested.
- Board materials related to Twitter’s mDAU calculations. In the June 17 Letter, Mr. Musk requested a variety of board materials and communications related to Twitter’s mDAU metric, its calculation of the number of spam and false accounts, its disclosure of the mDAU metric, and the company’s disclosure of the number of spam accounts on the platform. Twitter has provided an incomplete data set in response to this request, and has not provided information sufficient to enable Mr. Musk to make an independent assessment of Twitter’s board and management’s understanding of its mDAU metric.
- Materials related to Twitter’s financial condition. Mr. Musk is entitled, under Section 6.4 of the Merger Agreement to “all information concerning the business … of the Company … for any reasonable business purpose related to the consummation of the transactions” and under Section 6.11 of the Merger Agreement, to information “reasonably requested” in connection with his efforts to secure the debt financing necessary to consummate the transaction. To that end, Mr. Musk requested on June 17 a variety of board materials, including a working, bottoms-up financial model for 2022, a budget for 2022, an updated draft plan or budget, and a working copy of Goldman Sachs’ valuation model underlying its fairness opinion. Twitter has provided only a pdf copy of Goldman Sachs’ final Board presentation.
This is all just a very expensive way of saying “you promised us to provide us everything we needed, so we kept asking for more and more ridiculous, and impossible-to-actually-deliver information until we could claim you weren’t giving us what we needed, and so now we can claim you’re in breach.”
I mean, they list out five different requests, but the first four are all variations on the same made up nonsense request. And the last one is just thrown in as a Hail Mary in case the court sees through the first four.
Musk’s lawyers try to claim that the information that Twitter did provide Musk — basically access to the full Twitter Firehose API (which was always a kind of middle-finger to Musk’s bogus insincere request in the first place) — wasn’t enough to satisfy the agreement because, in part, it treated Musk like a common every day customer. *shudder*
Twitter only offered to provide Mr. Musk with the same level of access as some of its customers after we explained that throttling the rate limit prevented Mr. Musk and his advisors from performing the analysis that he wished to conduct in any reasonable period of time.
And, if you really want any extra proof that this was all pretextual and planned out back in May, and executed over the last month, Musk is doing this basically on the first day he can. The original merger agreement included a termination clause for contractual breach, with a 30 calendar day notice. It has been exactly 30 days since Musk sent that obviously pretextual complaint about providing data. We hit the deadline, and now Musk says he’s out.
Somewhat hilariously, Musk’s lawyers throw one more Hail Mary in at the end of the letter, claiming that because there were some management changes after the merger agreement was announced — including both some executive firings and some who just chose to get out before Musk became their boss — that this somehow violated another clause of the agreement to “preserve substantially intact the material components of its current business organization.” This is also legally weak sauce.
Not surprisingly, Twitter’s board chair immediately announced this was going to court, which is what everyone expected:
So, the next stage of the fight will happen in Delaware Court of Chancery, and who the hell knows what happens then. Lots of lawyers are going to start eyeing yachts, however.
On the whole, it seems fairly blatantly obvious that all of Musk’s excuses here are pretextual, and plotted out by his lawyers to try to get him out of a deal that didn’t actually have an escape hatch. The question before the court, really, is whether or not it matters that he’s obviously trying to escape a deal that he agreed to.
Perhaps the most likely outcome is that the two sides will come to some sort of agreement — with the most probable outcome being that Musk agrees to pay some amount for Twitter to drop the case and walk away. The question though, is what number will satisfy both parties. While the agreement has a $1 billion breakup fee, that’s not really controlling here. There are going to be long drawn out discussions regarding how much Twitter and Musk will each agree to in order to just walk away. It may come down to somewhere around that $1 billion, but my guess is that if Twitter believes it has a strong case to force Musk to go forward with the full $44 billion, that it may be able to force him to pay substantially more.
Of course, it’s not just Twitter and its Board who are likely to go to court over this. I fully expect multiple shareholder lawsuits to be filed. And quickly. And not necessarily in the Chancery Court in Delaware. And some of those may get… messy for Musk, who basically jerked around the shareholders for months, and (it can be credibly argued) did serious damage to the company’s value in the interim.
All that said, there’s a separate question of what happens to Twitter.
Some — who were opposed to the Musk takeover — may look at this as the best scenario, if Musk walks away but has to hand Twitter a lot of cash, that could be useful to keep Twitter going. However, the way these things usually work is that Twitter is now seen as wounded and vulnerable. And, I can’t see Twitter’s current board (or major institutional investors) being able to leave Twitter alone as an independent company like this. As such, my guess would be that some third party now tries to swoop in and buy up the pieces.
It seems unlikely that either Google or (especially) Facebook would be allowed to do so by the DOJ or the FTC, but you could see some other large companies jumping into the fray — including Microsoft (who once wanted to buy TikTok and Discord, and already owns GitHub and LinkedIn) and Walmart (who also wanted TikTok, and still pretends that it wants to be a digital giant, rather than just a commerce giant). There are some more “out of left field” options as well. A large media company (Comcast? Disney?!?) could make a play for it. I think AT&T and Verizon have been chastened and shamed by their internet service failures, but who knows?
Either way, at some point in this process, it seems likely that Twitter’s ownership is going to change drastically.
Finally, for all the trolls and muck throwers who celebrated Musk “freeing” Twitter, well, they’ll just have to slum it up at Parler, Truth Social, Gettr, Gab, or wherever else they need to go.
Filed Under: delaware chancery court, elon musk, escape clause, merger agreement, termination