OOver the past two months, many labels have been applied to Elon Musk’s proposed $44 billion takeover of Twitter. The takeover has variously been called a saga, a drama, a confrontation, a battle, and “capitalism gone rogue”. When a story involves someone as colorful as Musk and the narrative keeps changing, it’s easy to come up with more and more colorful terms to describe the events.
And why stop now? Musk certainly didn’t. The script changed again on Monday with Musk categorically declaring what he had been saying implicitly for several weeks: he will cancel the deal and walk away unless Twitter allows him to see the data used to calculate his estimate on the bots. and spam accounts that can inflate site traffic estimates. Twitter says it can’t, and it won’t.
At this point, calling the Musk-Twitter deal a saga or a drama somehow understates what’s going on. Really, it now looks like a multibillion-dollar game of chicken: Musk behind the proverbial wheel of one car, the Twitter board stacked in another, the two vehicles hurtling towards each other.
The dynamic of the game begins with Musk’s assertion that there are far more bots on Twitter than society acknowledges. Twitter and its CEO Parag Agrawal continue to claim that these spammers represent less than 5% of daily active accounts. Musk suggested the percentage is much higher, perhaps five times higher.
Musk said Monday that Twitter’s failure to provide him with bot data constituted a “material breach” of the merger agreement, a breach serious enough for him to terminate the agreement. Earlier he made a slightly different point, suggesting that divergence between his number and Twitter’s could be enough to nullify the deal, perhaps because a discrepancy between his number and Twitter’s could constitute fraud on Twitter’s part – or, if not outright fraud, then discovering the inconsistency could fall into the category of a so-called “Material Adverse Change”, a sudden event that would materially and negatively alter the course of Twitter’s business. If advertisers discovered that the place was, in fact, a ghost town full of fake profiles – fake people – they would probably be less willing to pay for ads there. Very bad for a business that depends on ad revenue. Very materially unfavourable, one might say.
But could you say that Musk has a chance of proving either case in court? Here, lawyers and jurists tend to sneak. Probably not, they usually say. And the last bit on Twitter not sharing its bot data with it is particularly slim, these experts say. “There is no specific clause in the merger agreement that obligates Twitter to do what Musk asks, and therefore Twitter does not violate the agreement if he refuses,” explains George Geis, professor of corporate law. at the University of Virginia. “Most merger agreements include an obligation on the part of the sellers to assist the buyer in carrying out due diligence. But Musk gave up on that. Yes, he certainly waived his right to due diligence in April when he reached an initial agreement with Twitter’s board.
But what if Musk isn’t looking for a foolproof legal case? And if he just wants: “The leverage effect,” says Geis. “I feel like at some point, maybe a week or two ago, he asked his lawyers to take a closer look and said, ‘Get me some real leverage. on the transaction. “”
That’s why it doesn’t matter if Musk is right about bots or if Twitter is. Musk doesn’t need to be right and win a case. He just needs to find something to move a case forward and end Twitter in time-consuming litigation. And he’s probably already found enough to do just that, these same experts say. Musk can afford to wait and pay the million-dollar fees his Skadden, Arps attorneys will rack up; Publicly listed Twitter doesn’t have the same luxury of unlimited time. Twitter’s board may have already viewed selling the company to Musk for $54.20 a share as a sensible fulfillment of its fiduciary duty to investors–especially since the stock market has plunged since the agreement was approved. But does forcing the company into a perilous state of limbo for years — as the courts consider Musk’s case — fulfill the same duty? Even if the board agrees, shareholders may not. The deal still needs to go to investors for a vote, which will take place later this year.
Predicting how this chicken game ends – a contest that has already proven so unpredictable – seems to be begging for the possibility of a face full of eggs. In the interest of thorough discussion, however, here’s an educated guess on the outcome: if markets remain depressed, Twitter’s car slams on its proverbial brakes first, and the board renegotiates. The company simply has more to lose than Musk in the lengthy process of involving a Delaware judge in the process.
Two other points to support this conclusion. A few weeks ago, Musk reorganized the financing he needed for his bid, removing a risky margin loan from the package of more than $45 billion in equity and debt. Typically, you don’t bother changing financing terms that you don’t intend to need. Then there’s the obvious, time-tested fact that most fine print M&A litigation almost always ends up with the two parties composing and carrying out the transaction. Ask a lawyer (or more), and they can usually only cite one or two examples that have gone through the legal system completely. As it happens, in the most recent example from 2018, a court allowed German healthcare company Fresenius to walk away from its purchase of Akorn, a generic drug maker, although the scale of the problems in ‘Akorn looks considerably larger than even the most bloated issues. figure on bots on Twitter.
Yet Fresenius-Akorn is the exception. More often than not, things usually end the way they did for LVMH when it bought Tiffany & Co. The two luxury companies sued in 2020 after LVMH tried to sabotage a deal to buy Tiffany, citing the effects of the pandemic on the jeweller’s business. In the end, they settled out of court once Tiffany agreed to a slightly reduced price, less than 3%.
“If you want to get a discount on something, you’re not going to say, ‘I want a discount,'” says Andrew Verstein, co-director of UCLA’s Lowell Milken Institute for Business Law and Policy. “You just need an excuse for a salesman to go to his constituents and say, ‘Look, this guy had a tough negotiation, and he pointed out some issues, and we were ready to make a new deal.