Over the last two months, quite a few labels have been applied to Elon Musk’s proposed $44 billion takeover of Twitter. The buyout has, variously, been called a saga, a drama, a clash, a battle and “capitalism gone rogue.” When a story involves someone as colorful as Musk, and when the narrative keeps shifting as it has, it’s easy to gin up increasingly colorful terms to describe the goings-on.
And why stop now? Musk certainly hasn’t. The storyline shifted again on Monday with Musk flatly stating what he has been saying implicitly for the past several weeks: He’ll call off the deal and walk away unless Twitter lets him see the data used to calculate its estimate about bots and spam accounts that may be inflating estimates of traffic to the site. Twitter says he can’t, and it won’t.
At this point, calling the Musk-Twitter deal a saga or a drama sorta undersells what’s going on. Really, it now resembles a multibillion-dollar game of chicken: Musk behind the proverbial wheel of one car, the Twitter board piled in another, the two vehicles hurtling toward each other.
The game’s dynamics begin with Musk’s assertion that there are many more bots on Twitter than the company acknowledges. Twitter and its CEO Parag Agrawal continue to maintain that those spammers account for less than 5% of daily active accounts. Musk has suggested the percentage is much higher, possibly five times as much.
Musk on Monday said Twitter’s failure to provide him with data on the bots constitutes a “material breach” of the merger agreement, a great enough violation for him to terminate the deal. Earlier, he argued a slightly different point, suggesting the discrepancy between his figure and Twitter’s might be enough to call off the deal, possibly because a variance between his number and Twitter’s might constitute fraud on Twitter’s part–or, if not outright fraud, then discovering the inconsistency might fall under the category of a so-called “Material Adverse Change,” a sudden event that would materially and adversely change the course of Twitter’s business. If advertisers found out the place was, in fact, a ghost town full of fake profiles—fake people—they’d probably be less inclined to pay for ads there. Very bad for a company reliant on ad revenue. Very materially adverse, you could say.
But could you say Musk has a shot at proving either case in court? Here, lawyers and legal experts tend to hem and haw. Probably not, they generally say. And the latest bit about Twitter not sharing its bots data with him is especially thin, those experts say. “There isn’t a specific term in the merger agreement that obliges Twitter to do what Musk is asking, and so Twitter is not breaching the agreement if they refuse,” explains George Geis, a corporate law professor at the University of Virginia. “Most merger agreements do have an obligation on the sellers’ part to assist the buyer with due diligence. But Musk waived that.” Yes, he certainly did forgo his right to due diligence back in April when he first struck a deal with Twitter’s board.
But what if Musk isn’t searching for a sure-proof legal case? What if he just wants: “Leverage,” says Geis. “My sense is that at some point maybe a week or two ago he asked his lawyers to take a closer look and said, ‘Get me real leverage on the transaction.’”
This is why it doesn’t really matter whether Musk is correct about the bots or whether Twitter is. Musk doesn’t need to be correct and win a trial. He merely needs to find something to get a case going and wrap up Twitter in time-consuming litigation. And he’s likely already found enough to do that, those same experts say. Musk can afford to wait and afford the million-dollar fees his Skadden, Arps lawyers will accumulate; publicly traded Twitter doesn’t have the same luxury of limitless time. Twitter’s board may have once viewed selling the company to Musk for $54.20 a share as a sensible fulfillment of its fiduciary duty to investors–particularly since the stock market has plunged since the deal was approved. But does forcing the business into a perilous state of years-long limbo—as the courts sift through 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 happen at some later date this year.
Predicting how this game of chicken ends—a contest that has already proven so unpredictable—seems to beg the possibility of getting a face full of egg. For the sake of a fulsome discussion, though, here’s an educated guess at the outcome: If the markets stay depressed, the Twitter 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 some Delaware judge in the process.
Two more points to bolster this conclusion. A couple weeks ago, Musk rejiggered the financing he needs for his bid, removing a risky margin loan from the package of $45 billion-plus in equity and debt. Generally, you do not muck around with changing the terms of financing you do not intend to need. Then there is the plain, time-tested fact that most fine-print M&A disputes almost always end with the two parties making up and consummating the transaction. Ask a lawyer (or several), and they can generally only point to one or two examples that wound fully through the legal system. As it happens, in the most recent example from 2018, a court did allow German healthcare company Fresenius to walk away from its purchase of Akorn, a generic drug manufacturer, though the scale of Akorn’s problems do seem drastically greater than even the most fluffed-up figure about bots on Twitter.
Yet Fresenius-Akorn is the exception. More often than not, things generally conclude as they did for LVMH when it bought Tiffany & Co.. The two luxury companies sued each other in 2020 after LVMH tried to scupper a deal to buy Tiffany, citing the pandemic’s effects on the jeweler’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 don’t go and say, ‘I want a discount,’” says Andrew Verstein, co-director of UCLA’s Lowell Milken Institute for Business Law and Policy. “You just need to have some pretext on which a seller can go to their constituents and say, ‘Look, this guy drove a hard bargain, and he pointed out some issues, and we were willing to cut a new deal.’”
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