Twitter v Musk

The background

On 14 April 2022 Mr Elon Musk made a bid for Twitter Inc. in the sum of $43Bn. Twitter’s response on the following day (15 April 2022) was to create a poison pill. The effect of the poison pill would be to issue new shares to dilute any hostile party’s share-holding. On 23 April, Mr Musk made a best and final offer in the sum of $44Bn and this was accepted by the Twitter board of directors. On 8 July, Mr Musk announced his intention not to go through with the deal.

The offer, and the share price of Twitter, since it was made

This offer equated to $54.20 per share. The Parties signed a ‘Seller Friendly’ agreement. At the time the B&F offer was made, the Twitter share price closed trading at $51.70. The share value at 8 July 2022 at close had fallen to $36.81. We are talking about a 30% drop in value between the date the offer was made and the date when Mr Musk announced on 8 July his intention not to proceed. 

The reaction of Twitter

The reaction of twitter to Mr Musk’s announcement was instant and visceral. Bret Taylor, the Chair of Twitter, announced Twitter’s commitment to ‘closing the Transaction on the price and terms agreed…..and plans to pursue legal action’ (Bret Taylor, Tweet, 08.07.2022).

The pleaded case

The language of the pleaded case as filed contains language that would be alien to an English lawyer in terms of its emotional level.

“Having mounted a public spectacle to put Twitter in play, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he — unlike every other party subject to Delaware contract law — is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away,”

The central thrust of the pleaded case is at paragraph five of the Verified Complaint and it makes harsh reading:

5. After the merger agreement was signed, the market fell. As the Wall Street Journal reported recently, the value of Musk’s stake in Tesla, the anchor of his personal wealth, has declined by more than $100 billion from its November 2021 peak.

The Verified Complaint, filed with the Delaware Court of Chancery then goes on at paragraph six as follows:
 
6. So Musk wants out. Rather than bear the cost of the market downturn, as the merger agreement requires, Musk wants to shift it to Twitter’s stockholders. This is in keeping with the tactics Musk has deployed against Twitter and its stockholders since earlier this year, when he started amassing an undisclosed stake in the company and continued to grow his position without required notification. It tracks the disdain he has shown for the company that one would have expected Musk, as its would-be steward, to protect. Since signing the merger agreement, Musk has repeatedly disparaged Twitter and the deal, creating business risk for Twitter and downward pressure on its share price.

This is not the tight, dry legal discourse with which English lawyers are used to dealing, but the gist of the thing is that Mr Musk made a bad bargain and he wants out.

Mr Musk’s case

Mr Musk’s publicly stated position is that Twitter made ‘misleading representations’ on the number of actual human users of Twitter as opposed to spam bots. Further, he has made reference to Twitter failing to comply with its ‘contractual obligations’.  It is understood that Mr Musk will allege that Twitter has, since 25 April 2022, failed to operate its normal business. It has, so says Mr Musk, dismissed executives and instituted a moratorium on hiring.

We will learn more when the Defence is fully pleaded.

Analysis

Twitter are seeking relief from the Chancery Court as follows (from the Verified Complaint):

B. Ordering defendants to specifically perform their obligations under the merger agreement and consummate the closing in accordance with the terms of the merger agreement;

In short, Twitter are seeking an order forcing the $44Bn deal to go ahead.

Elements of the 25 April 2022 Agreement are quoted in the Verified Complaint. It is certainly true that paragraph 6.4 of the Agreement provides that reasonable access to the ‘business, properties and personnel’ of Twitter must be provided to Mr Musk, but that access is limited to the ‘consummation of the transactions contemplated by this Agreement’. In other words, Due Diligence should have been completed before the Agreement was signed. The access is limited to the takeover and not to the value of the underlying business.

A drop in the market value of Twitter is specifically excluded by Article I of the Agreement. We must wait to see, therefore, what the pleaded Defence is.  As matters stand, it is the opinion of this writer that Mr Musk has a high mountain to climb. These agreements are designed to ensure a Merger or Acquisition goes ahead.

It is to be expected that Mr Musk will rely on the get out clause which provides he may withdraw for $1Bn, but given that the market value of Twitter has dropped 30%, this might be the least bad option.
 
Jonathan Compton
LLN LLM Solicitor Barrister MCIArb.