“Oh hi lol.”[1] Despite its perceived innocence, this subtle tweet was the start of an ongoing conflict over Elon Musk’s purchase of Twitter, Inc. That same day, April 4, 2022, Musk, CEO of Tesla, Inc. and the world’s richest person, disclosed to the SEC that he had accumulated 9.2 percent of Twitter’s stock.[2] In response, Twitter enacted a shareholder rights plan, known as a “poison pill,” to stop Musk from a hostile takeover.[3] Despite Twitter’s maneuver—and perceived animosity between the two parties—Twitter announced ten days later that it had entered into a merger agreement (the “Agreement”) with Musk.[4] Musk would purchase Twitter in its entirety for $54.20 per share, a transaction valued at approximately $44 billion.[5]
Elon Musk Backs Out
Shortly after this Agreement, Musk began to signal his reluctance in going through with the deal.[6] It first began on May 13th, when Musk indicated that his acquisition of Twitter was “on hold.” In so doing, Musk cited a lack of support for Twitter’s calculation that its spam/fake accounts represented less than 5% of all Twitter users.[7] Nonetheless, Musk tweeted that he was still committed to the deal just two hours later.[8] Then, on June 8th, Musk asked Twitter for more information on its spam accounts, and Twitter ultimately agreed to provide him with direct access to its “firehose,” the stream of millions of tweets that flow through Twitter’s network each day.[9] Nonetheless, on July 8th, Musk informed Twitter that he was terminating the Agreement due to a continuing disagreement over the number of spam accounts on Twitter’s platform.[10] In his letter to Twitter, Musk alleged that Twitter: (1) made “materially inaccurate representations” in the Agreement that were “reasonably likely to result in” a Company Material Adverse Effect; (2) failed “to comply with the ordinary course covenant by terminating certain employees, delaying hiring, and failing to retain key personnel”; and (3) engaged in a “breach of information-sharing and cooperation covenants.”[11]
Twitter Sues Elon Musk
In response, Twitter sued Musk on July 12th in Delaware Chancery Court to enforce the Agreement, denying Musk’s claims and calling for specific performance and injunctive relief.[12] Twitter alleged that Musk refused to honor his obligations to Twitter and its stockholders because the deal “no longer serve[d]his personal interests.”[13] Musk then countersued Twitter, accusing the company of fraud due to misrepresentations of its business and metrics on spam accounts.[14] During the litigation, Delaware Chancery Court Chancellor Kathaleen McCormick declined to delay the trial on multiple occasions while limiting the type of data Musk could acquire from Twitter about its fake accounts.[15] On October 4th, seemingly out of nowhere, Musk sent a letter to Twitter agreeing to fulfill his obligations under the original Agreement.[16] In response, Chancellor McCormick postponed the trial set for October 17th and gave Musk until October 28th to close the deal.[17]
Elon Musk Agrees to Original Deal
The critical question is why Musk reversed course and agreed to buy Twitter at the original merger price of $44 billion two weeks before the trial? In early October, Musk also had the option of going to trial or settling the case, but his legal arguments were weak and a settlement could have been costly. [18] Musk did not conduct due diligence as part of the Agreement.[19] Musk was aware of Twitter’s fake accounts prior to the Agreement and failed to negotiate contractual protections to address these concerns.[20] Further, he would have had the burden of not only proving that the spam account calculations were false but that the difference in the number of spam accounts would have had a materially adverse effect on Twitter’s future earnings.[21] This would have been difficult to prove.[22] According to Twitter’s disclosures to the SEC, there has been no change in the percentage of fake bots on its platform for the last eight years.[23] Instead, it is more likely that Musk’s hesitance to purchase Twitter came from a decrease in Tesla’s stock price in the weeks after the Agreement.[24] Selling his Tesla shares was a key source of financing, making his purchase of Twitter now significantly more expensive.[25]
In addition, Musk argued that Twitter had not been running its business in the “ordinary course” because it fired two high-level employees and announced it would be firing one-third of its employees.[26] This argument, however, was likely to fail as firing employees is common, especially during a potential economic recession.[27] Further, Musk argued that Twitter did not reasonably provide him with information regarding its bots that was necessary for him to complete the deal.[28] If Twitter failed to comply with this obligation “in all material respects” under the Agreement, Musk would be in his rights to terminate the Agreement.[29] Twitter promised to provide certain information before closing, and it had to fulfill this obligation whether or not there would have been a material adverse effect if Twitter failed to do so.[30] Twitter, however, had consistently provided Musk with information about its bot calculation, thus likely falling within the reasonable threshold.[31]
The Agreement also contains a specific performance clause that could have forced Musk to purchase Twitter if his debt financing for the deal remained intact.[32] However, even if his debt financing disappeared, Chancellor McCormick still could have forced Musk to find the money another way.[33] In a recent decision by Chancellor McCormick, Snow Phipps Grp. LLC v. KCAKE Acquisition, Inc.,[34] she ruled that a party seeking specific performance must establish that: (1) a valid contract exists; (2) the party seeking specific performance is ready, willing, and able to perform; and (3) a “balance of equities tips in favor of the party seeking specific performance.”[35] In that case, Chancellor McCormick ruled against KCAKE, requiring the acquisition vehicle to perform under the terms of the merger agreement despite KCAKE losing its debt financing.[36] Here, it is likely that Twitter would qualify under all three prongs because a valid contract exists, Twitter is willing and able to perform, and Musk’s conduct—which includes disparaging Twitter and “toying” with the SEC’s rules—has been inequitable[37] In the end, trial likely would have concluded with Musk purchasing Twitter under the terms of the original Agreement, plus an expenditure of millions of dollars in legal fees.[38]
At the same time, Musk was reluctant to have his deposition taken in preparation for trial.[39] In fact, Musk’s deposition had been postponed multiple times.[40] Through the pre-trial process, embarrassing texts were released between Musk and many of his friends.[41] He may have been afraid of private and “uncomfortable” facts becoming public.[42] Similarly, his deposition could have been used to highlight Musk’s “extremely inconsistent statements.”[43] Lastly, the terms included a potential $1 billion breakup fee if either Twitter or Musk wrongfully terminated the Agreement.[44] This figure would have likely been the starting point for any settlement talks between the parties.[45] Some have suggested, however, that a settlement could have cost Musk closer to $5 billion, making this option unlikely.[46]
Conclusion
Musk agreed to complete his acquisition of Twitter on October 27th.[47] In his first act as owner, Musk fired Twitter’s CEO, CFO, and top legal and policy executive.[48] The world will be watching to see what Twitter’s future holds under Musk’s stewardship.
[1] @elonmusk, Twitter (Apr. 4, 2022, 12:04 PM), https://twitter.com/elonmusk/status/1511011921495011328?ref_src=twsrc%5Etfw.
[2] Fred Imbert, Twitter shares close up 27% after Elon Musk takes 9% stake in social media company, CNBC (Apr. 5, 2022), https://www.cnbc.com/2022/04/04/twitter-shares-soar-more-than-25percent-after-elon-musk-takes-9percent-stake-in-social-media-company.html; see also Eliza Haverstock, Elon Musk Nearing $300 Billion Fortune, Is The Richest Person In History, Forbes (Oct. 26, 2022, 1:07 PM), https://www.forbes.com/sites/elizahaverstock/2021/10/26/elon-musk-nearing-300-billion-fortune-is-the-richest-person-in-history/.
[3] Lauren Hirsch & Kate Conger, Twitter Counters a Musk Takeover With a Time-Tested Barrier, N.Y. Times (Apr. 15, 2022), https://www.nytimes.com/2022/04/15/business/twitter-poison-pill-elon-musk.html?smid=em-share.
[4] Twitter Inc., Elon Musk to Acquire Twitter, Cision (Apr. 25, 2022), https://www.prnewswire.com/news-releases/elon-musk-to-acquire-twitter-301532245.html.
[5] Id.
[6] See @elonmusk, Twitter (May 13, 2022, 5:44 AM), https://twitter.com/elonmusk/status/1525049369552048129.
[7] Id.
[8] Id.
[9] Lauren Hirsch & Mike Isaac, Twitter Said to Agree to Give Elon Musk Access to Stream of Tweets, N.Y. Times (June 8, 2022), https://www.nytimes.com/2022/06/08/technology/twitter-musk-firehose-tweets.html.
[10] Amendment No. 9 to Schedule 13D (Ex. P), Twitter, Inc. v. Elon Musk et al., 2022-0613-KSJM (Del. Ch. July 8, 2022).
[11] Id.; Verified Complaint at 4, Twitter, Inc. v. Elon Musk et al., 2022-0613-KSJM (Del. Ch. July 12, 2022).
[12] Verified Complaint supra note 11, at 59
[13] Id. at 1.
[14] Kate Conger, Musk Says Twitter Committed Fraud in Dispute Over Fake Accounts, N.Y. Times (Aug. 4, 2022), https://www.nytimes.com/2022/08/04/technology/musk-twitter-fraud.html; see also Sarah E. Needleman, Elon Musk Against Twitter: What to Know About Their Coming Trial, Wall St. J. (Sept. 7, 2022), https://www.wsj.com/articles/elon-musk-twitter-trial-delaware-court-11661809622.
[15] Erin Mulvaney & Alexa Corse, Twitter, Elon Musk Spar Over Legal Preparations as Trial Date Looms, Wall St. J. (Sept. 26, 2022), https://www.wsj.com/articles/twitter-musk-spar-over-legal-preparations-as-trial-date-looms-11664162964.
[16] Lauren Hirsch & Kate Conger, Judge Grants Elon Musk’s Request to Delay Trial With Twitter, N.Y. Times (Oct. 6, 2022), https://www.nytimes.com/2022/10/06/technology/elon-musk-twitter-trial.html?smid=url-share.
[17] Id.
[18] Anirban Sen & Tom Hals, Musk reverses course, again: he’s ready to buy Twitter, build ‘X’ app, Reuters (Oct. 4, 2022), https://www.reuters.com/markets/europe/musk-said-go-ahead-with-5420-share-twitter-deal-bloomberg-reporter-2022-10-04/; see also Tom Hals, Analysis: Twitter has legal edge in deal dispute with Musk, Reuters (July 11, 2022), https://www.reuters.com/technology/twitter-has-legal-edge-deal-dispute-with-musk-2022-07-09/.
[19] John C. Coffee, Jr., Twitter v. Musk: Where Are the Arbs?, Colum L. Sch.: CLS Blue Sky Blog (July 27, 2022), https://clsbluesky.law.columbia.edu/2022/07/27/twitter-v-musk-where-are-the-arbs/.
[20] Id.
[21] Matt Levine, Musk lost interest in pretending to buy Twitter., Bloomberg (July 9, 2022), https://www.bloomberg.com/opinion/articles/2022-07-09/elon-s-out?leadSource=uverify%20wall.
[22] See Hals, supra note 18; see also Levine, supra note 21.
[23] See Levine, supra note 21.
[24] Id.
[25] Id.
[26] Id.
[27] Id.
[28] Id.
[29] Id.
[30] Id.
[31] Id.
[32] Adam Satariano & Lauren Hirsch, Musk Says His Twitter Takeover Is ‘On Hold,’ Then Says He’s ‘Still Committed’, N.Y. Times (May 13, 2022), https://www.nytimes.com/2022/05/13/technology/elon-musk-says-his-takeover-of-twitter-is-on-hold.html.
[33] See generally Snow Phipps Grp., LLC v. KCAKE Acquisition, Inc., No. 2020-0282-KSJM, 2021 Del. Ch. LEXIS 84 (Del. Ch. Apr. 30, 2021).
[34] Id.
[35] Id. at *108; see also Coffee, Jr. supra note 19.
[36] Snow Phipps Grp., 2021 Del. Ch. LEXIS, at *120.
[37] See Coffee, Jr. supra note 19.
[38] See Sen & Hals, supra note 18; see also Hals, supra note 18.
[39] See Sen & Hals, supra note 18.
[40] Jon Porter, Elon Musk’s Twitter deposition reportedly delayed as companies work to close deal, Verge (Oct. 6, 2022), https://www.theverge.com/2022/10/6/23390603/elon-musk-twitter-deposition-delayed-negotiations-deal-acqusition.
[41] See Hawkins & Pierce, supra note 3; see generally Redacted Version of Ex. H to Letter to The Honorable Kathaleen St. J. McCormick from Edward B. Micheletti, Esquire, regarding Twitter, Inc.’s Mot. for Sanctions against Defs.’ for disc. misconduct, Twitter, Inc. v. Elon Musk et al., 2022-0613-KSJM (Del. Ch. Sept. 29, 2022), File and Serve 654.
[42] See Sen & Hals, supra note 18.
[43] See Porter, supra note 40.
[44] Twitter, Inc., Current Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 (Form 8-K) (Apr. 25, 2022).
[45] Id.
[46] Brian Contreras, How weird could things get if Twitter settles with Elon Musk?, L.A. Times (July 16, 2022), https://www.latimes.com/business/story/2022-07-16/what-could-happen-if-twitter-and-elon-musk-settle.
[47] See Hirsch & Conger, supra note 16.
[48] Lauren Thomas & Alexa Corse, Elon Musk Closes Twitter Deal, Immediately Fires Top Executives, Wall St. J. (Oct. 28, 2022), https://www.wsj.com/articles/elon-musk-completes-twitter-takeover-11666918031.
