Introduction
Many mergers and acquisitions proceed through their stages of courtship and merger with little melodrama. But one did not. It was filled with accusations of fraud, deception and high emotion fueled by the $44 billion price tag.
Yes, it was the recent soap opera involving Elon Musk’s acquisition of Twitter. Before it concluded, it had involved the intersection of litigation with transactional law. The closing took place on Oct. 27, 2022, the day before the Delaware Chancery Court was to schedule a trial during November 2022. Twitter had brought its action for specific performance of the merger agreement with an acquisition price of $44 billion, to which Musk had originally agreed on April 25, 2022, when the parties executed the agreement. The many accusations by Musk of dastardly deeds by Twitter moved the acquisition price not one dime.
This article is based on the pleadings filed in the Delaware Chancery Court by the parties, available online, and on a few additional articles published on the case. The reader may assume that Musk denied all the allegations in Twitter’s complaint filed on July 12, 2022, and that Twitter denied all the allegations in Musk’s counterclaim filed on Sept. 15, 2022. This article will examine the major issues raised by the parties and will raise a question but not answer it. Indeed, Musk himself might be the only one who could answer it. The question is, “Why?”
Alleged misrepresentations by Twitter
Perhaps the most egregious allegation by Musk was that Twitter misrepresented the number of its daily users. This would directly impact Twitter’s value, as it was the basis for the fees it charged to its advertisers and, as a result, the basis for the $44 billion value. [Musk Counterclaim, Nos. 3 and 22.] Musk claimed that a key purpose of Twitter’s monetized daily active users (mDAU) was to deceive investors.
Twitter had reported that approximately 5% of its mDAU were fake or “bots.” Musk claimed on May 17, 2022, that 20% were fake or spam accounts, possibly higher. [Complaint, No. 81.] Twitter claimed that it had disclosed to Musk the full process that it had used to estimate spam as a percentage of mDAU. [Complaint, No. 84.]
On June 15, 2022, Twitter gave Musk’s team access to about 49 tebibytes of raw data to analyze on its own. [Complaint, No. 93.] Twitter at all times maintained that the 5% was an “estimate” requiring “significant judgment” to prepare. [Complaint, No. 94.] On June 30, 2022, Musk admitted that he had not read the detailed summary of Twitter’s sampling process, which Twitter had provided in May 2022. Twitter offered to meet with Musk and explain its sampling process, but that meeting never took place. [Complaint, No. 101.]
Musk's position
On July 8, 2022, one of Musk’s lawyers wrote a most comprehensive eight-page letter detailing each of Musk’s allegations with extensive support and stating that Musk was terminating the merger agreement based on, among other things, Twitter’s misrepresentations of the mDAU. [Complaint, Exhibit 3.]
There are, however, additional issues worth noting.
No disparaging tweets
Article VI, Section 6.8 of the merger agreement [Complaint, Exhibit 1] provided that Musk may tweet about the transaction only “so long as such tweets do not disparage the Company ….” Musk alleged, among many other things, that Twitter’s Securities and Exchange Commission (SEC) Form 10-K for 2021 made many misrepresentations, including that its spam accounts were less than 5%. [Counterclaim, Nos. 3 and 22.] However, it would seem that Musk’s many criticisms of Twitter might have breached the above Article VI, Section 6.8, page 51 of the agreement, even if they were accurate.
Material adverse effect
Musk claimed that Twitter’s misrepresentations to the SEC about its mDAU constituted a company material adverse effect. Musk claimed that, as a result, he could terminate the merger agreement without paying the $1 billion fee under Sections 7.2 (c) and 8.1 (d) (i). [Counterclaim, Nos. 293 and 294.]
The agreement defines a “Company Material Adverse Effect” under “Definitions,” page 5, as “any change, event, effect or circumstance which, individually or in the aggregate, has resulted in or would reasonably be expected to result in a material adverse effect on the business, financial condition or results of operations of the Company ….”
A “material adverse effect” provided a potential escape from the agreement, but the agreement in the above “definition” excluded many items from such an adverse effect, including “any matter disclosed in the Company SEC Documents” under “Risk Factors” or “Forward-Looking Statements” filed with the SEC prior to the date of the agreement.
Discovery rulings
The litigation continued into the discovery phase. On Aug. 23, 2022, Judge Kathaleen S. McCormick of the Delaware Chancery Court made several discovery rulings against Musk, including on a very frequently utilized interrogatory seeking the identity of persons with knowledge of the facts at issue.
Musk had objected that Twitter’s requests were “overbroad” and “seeking information not relevant to the parties’ claims and defenses.” Additionally, Musk “self-limited” his response to 41 people he claimed had “unique knowledge” of the since-shelved merger deal.
Musk sought to exclude “friends and acquaintances with whom” he “may have had passing exchanges regarding Twitter or the Merger in general terms….” Musk also complained that any further information “would not be remotely proportionate to the needs of the case” since his side offered up a trove of text messages. Twitter, on the other hand, said the unique-knowledge limit was simply an effort by Musk to exclude certain “advisors” to relevant individuals and organizations as well as “representatives of Musk who participated in diligence sessions, other advisors or consultants to Musk, and other individuals and entities with whom Mr. Musk communicated about the deal.”
Judge McCormick ruled for Twitter, commenting that Musk couldn’t have that many friends, but even if he did, such alleged burdens were beside the point. “Even assuming that Musk has many friends and family members, [Musk’s] breadth, burden, and proportionality arguments ring hollow,” given the size of the $44 billion transaction. Law & Crime, a Dan Abrams Production, Colin Kalmbacher, Aug. 23, 2022, 5:08 p.m.
Continued deposition
The parties subsequently agreed to continue Musk’s Oct. 6, 2022, deposition. CNN Business, Claire Duffy, 12:59 p.m., Oct. 6, 2022.
Musk's renewed offer to close
Musk had written to Twitter on Oct. 3, 2022, offering to close the Twitter transaction at the original price if the litigation could be stayed. Bloomberg, Messrs. Feely, Hammond and Wagner, Oct. 4-5, 2022; CNBC, Jonathan Vanian, Oct. 6, 2022, 3:28 p.m.
Trial date
The court issued an order on Oct. 6, 2022, staying the action until Oct. 28, 2022, to permit the parties to “close the transaction.” The trial had been scheduled for Oct. 17, 2022. CNBC, CNN, Clare Duffy, 12:29 p.m., Oct. 6, 2022. The court further ruled, “If the transaction does not close by 5 p.m. on Oct. 28, 2022, the parties are instructed to contact me by email that evening to obtain November 2022 trial dates.” [Court’s Letter Ruling, Oct. 6, 2022.]
Closing
The transaction closed on Oct. 27, 2022, for $44 billion, according to
The New York Times, Oct. 27, 2022, Kate Conger and Lauren Hirsch.
Conclusion
Musk labored long and hard; hired many talented, and presumably expensive, lawyers; and strove mightily to escape the transaction, but ultimately closed for the original $44 billion. There was no resolution on the merits of the many issues raised in the above July 8, 2022, letter by Musk’s attorney and in his lengthy and detailed counterclaim.
It seems that litigation intersected with the transaction and the transaction closed as originally intended. Why, then, did Musk do all this? Not for a better price and not for better leverage after the closing, as Musk purchased Twitter outright and now owns it privately. The accurate and complete answer resides with Musk. We might never know.
Philip M. Howe is a civil litigator with lengthy experience in defending complex medical and financial issues in the areas of life, disability, health, automobile, homeowners, property and casualty insurance, including claims of bad faith. He has additional experience in litigating condominium, construction, medical malpractice, personal injury and real estate litigation. He has tried cases in California and Massachusetts, and state and federal courts. Howe has also managed litigation nationwide as house counsel for an insurer that issued individual and group life, health and disability insurance. Howe has recently been certified as an arbitrator by ARIAS-US. He is in private practice in Boston.