The Saga of Elon and Twitter
As has been widely reported, Elon has unilaterally terminated his agreement to buy Twitter. Almost since the minute Elon announced he was going to acquire Twitter, the writing has been on the wall for the deal to collapse. Elon has a long history of announcing things that never actually happen, so I had no real confidence he would actually end up buying Twitter. All the fun was in seeing how he tried to wiggle out of the deal.
By way of background, Elon Musk, the richest man in the world (he’s worth about $260 Billion right now) offered $54.20 a share to buy Twitter (after a whole saga where he purchased some shares and joined the board and quit the board). Elon’s musings about buying Twitter pretty quickly moved on to signing a legally binding merger agreement. Unfortunately for Elon, shortly afterward, tech stocks imploded and both Twitter and Tesla’s stocks lost significant value.
This left Elon in a pretty bad position, he had locked himself into buying Twitter for significant more than it was now worth. It was pretty clear from his public statements that, at this point, Elon had decided he wanted out of the deal. Unfortunately for him, the agreement he signed didn’t give him a lot of wiggle room to get out of the deal.
Ultimately, his lawyers came up with three pretexts for Elon terminating the agreement and issued a letter to that end. (You can read the letter at: https://www.sec.gov/Archives/edgar/data/1418091/000110465922078413/tm2220599d1_ex99-p.htm)
None of these pretexts are strike me as particularly compelling. But let’s go through them, from worst to best:
First, Elon alleges that Twitter failed to continue to conduct its business in the ordinary course. Here, Elon makes some specific accusations:
“Twitter’s conduct in firing two key, high-ranking employees, its Revenue Product Lead and the General Manager of Consumer, as well as announcing on July 7 that it was laying off a third of its talent acquisition team, implicates the ordinary course provision. Twitter has also instituted a general hiring freeze which extends even to a reconsideration of outstanding job offers. Moreover, three executives have resigned from Twitter since the Merger Agreement was signed: the Head of Data Science, the Vice President of Twitter Service, and a Vice President of Product Management for Health, Conversation, and Growth. The Company has not received Parent’s consent for changes in the conduct of its business, including for the specific changes listed above.”
While a whole lot of legal ink has been spilled over the years on what is and is not ‘in the ordinary course of business’. In this case, Elon is drawing a very long bow. Firing a few employees in generally going to be in the ordinary course of business, and having employees quit is hardly Twitter’s fault. It also feels pretty reasonable to institute a hiring freeze given the current economic climate. A lot of other tech companies have done the same (including Elon’s own Tesla).
Second, Elon agues that Twitter is lying about the number of bots and fake accounts on the platform. Elon specifically states that he “strongly believes that bots are wildly higher than 5%”. He provides absolutely no evidence at all to support this ‘strong belief’, probably because he doesn’t have any.
Even if he can prove that bot accounts are a bit higher than Twitter has been disclosing, it won’t help Elon. To terminate the agreement, Elon would need to show that this has a ‘material adverse effect’ (MAE) on Twitter’s business. A few percent here and there in bot account numbers just isn’t going to get over that bar.
Twitter has made public disclosures for years that the numbers of bots and spam accounts on the platform is around 5% so unless Twitter has been perpetrating a massive fraud on its shareholders and advertisers for almost a decade, and Elon is the only one to have noticed, the bot excuse is just hot air.
Elon’s final pretext, while still pretty terrible, is probably the best of Elon’s arguments, but the way he has gone about making it has almost entirely undermined it. Under the agreement, Twitter has to comply with reasonable requests from Elon for information.
So, Elon and his lawyers adopted an incredibly transparent strategy of asking Twitter for ever-increasing amounts of ever more esoteric data from Twitter and when Twitter baulked a providing some of the information, or didn’t provide the information in exactly the format Elon wanted, boom, pretext for terminating the agreement.
This is unlikely to work. It’s just too obvious what they’ve tried to do here, and it’s clear from filings that Twitter has made a serious effort to provide Elon with any information he reasonably requested. The agreement requires Twitter to provide him with information that he needs “for any reasonable business purpose related to the consummation of the transactions contemplated by this Agreement”, not absolutely anything he asks for.
In fact, Elon has made it pretty clear in his public comments that he has been seeking information for the express purpose of getting out of the deal, giving Twitter a reasonable excuse to withhold information. Twitter also doesn’t have to give Elon any information that would “cause significant competitive harm to the Company or its Subsidiaries if the transactions contemplated by this Agreement are not consummated”. Given Elon’s publicly stated purpose for requesting all the information is to show that Twitter has been perpetrating a massive fraud on their investors and advertisers, they probably have a reasonable argument here for not providing the information as well.
So, where does this all go next? Twitter has started taking steps to sue Elon seeking specific performance of the Contract, and they’ve retained some high-profile lawyers to represent them. This is most likely the only good outcome for Twitter. Given the damage this whole sage has caused to their business, getting only the $1 billion damages set out in the contract would be a disaster for Twitter.
It’s going to be very interesting to watch how this plays out.