And We’re Off: Twitter Sues Elon Musk And Lays Out A Strong Case
from the fucked-around,-found-out dept
As we fully expected, Twitter is going to the Delaware Court of Chancery to force Elon Musk to give them the $44 billion he promised. There’s a lot of misinformation being spewed about this case, but let’s go through the details of why Musk is basically in deep shit, and will be lucky if he’s able to escape this by paying “only” $1 billion.
As we’ve said, contrary to the claims you will hear from Musk’s buffoonishly clueless supporters, this has nothing to do with how many spam accounts are on Twitter and whether or not Twitter is accurately counting them. That wouldn’t be an excuse to void the deal in the first place, because Twitter offered him the chance to understand those numbers and Musk rejected it both before and after the deal.
As we explained in our previous posts, it seems quite clear that Musk got cold feet a few weeks after the deal was signed, perhaps because his other stock holdings were tanking, perhaps because he was beginning to realize that he had no clue what to actually do with Twitter, or perhaps he just rolled over in bed one morning and thought “what the fuck have I done?”
At that point, he got his extraordinarily expensive lawyers to comb through the agreement to find any possible shred of a way he could get out of the deal. The problem, of course, is that the deal was pretty ironclad. The only thing they seemed to find was the clause that required Twitter to give Musk information he requested for the purpose of closing the deal — though the contract has caveats that leave it up to Twitter to determine if the requests are reasonable, and also to make sure that they wouldn’t do harm to Twitter’s business.
In response, it seems Musk and his fabulously wealthy-and-getting-wealthier lawyers cooked up a scheme to pretend that he’s super concerned about how spammers are counted, and kept asking for more and more information about it. Not, of course, to actually figure out how many spammers are on the platform, but to just keep coming up with more and more ridiculous requests for information so that they could then turn around and say Twitter wasn’t providing them what they needed, and therefore Twitter was in breach.
We laid all this out in previous posts, but the lawsuit does it much better and much more thoroughly, and adds new and embarrassing details for Musk. After laying out the details of the deal, including that Musk agreed to no financing contingency and no due diligence (oops), it notes that Musk clearly wanted out and cooked up this ludicrous scheme to get out:
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.
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.
For those who keep claiming Musk’s change of mind has to do with the spam question, Twitter lays out how obviously bullshit that has been from the start (again, something we pointed out). Musk said from the beginning he wanted to rid the platform of spam, suggesting he believed that this was a major problem on the site and one that he would take care of. It makes no sense at all for him to then claim to be shocked that there was more spam than stated before.
Musk’s exit strategy is a model of hypocrisy. One of the chief reasons Musk cited on March 31, 2022 for wanting to buy Twitter was to rid it of the “[c]rypto spam” he viewed as a “major blight on the user experience.” Musk said he needed to take the company private because, according to him, purging spam would otherwise be commercially impractical. In his press release announcing the deal on April 25, 2022, Musk raised a clarion call to “defeat the spam bots.” But when the market declined and the fixed-price deal became less attractive, Musk shifted his narrative, suddenly demanding “verification” that spam was not a serious problem on Twitter’s platform, and claiming a burning need to conduct “diligence” he had expressly forsworn.
Musk’s strategy is also a model of bad faith. While pretending to exercise the narrow right he has under the merger agreement to information for “consummation of the transaction,” Musk has been working furiously — albeit fruitlessly — to try to show that the company he promised to buy and not disparage has made material misrepresentations about its business to regulators and investors. He has also asserted, falsely, that consummation of the merger depends on the results of his fishing expedition and his ability to secure debt financing
And, yes, Twitter’s lawyers directly call out Musk’s announced reasons for trying to call off the deal as “pretextual” because that’s what they obviously were. It’s just so damn obvious to anyone watching the details that Musk wanted out, and this was the only escape hatch his lawyers could see as vaguely credible (but just barely so). I expected Twitter to call all this out, but I’m impressed at how directly and bluntly they do so:
These claims are pretexts and lack any merit. Twitter has abided by its covenants, and no Company Material Adverse Effect has occurred or is reasonably likely to occur. Musk, by contrast, has been acting against this deal since the market started turning, and has breached the merger agreement repeatedly in the process. He has purported to put the deal on “hold” pending satisfaction of imaginary conditions, breached his financing efforts obligations in the process, violated his obligations to treat requests for consent reasonably and to provide information about financing status, violated his non-disparagement obligation, misused confidential information, and otherwise failed to employ required efforts to consummate the acquisition.
And then, there’s the bit that lots of people were also expecting: Twitter is going to court to try to force Musk to complete the deal he signed, which never had an escape clause like this.
Twitter is entitled to specific performance of defendants’ obligations under the merger agreement and to secure for Twitter stockholders the benefit of Musk’s bargain. Musk and his entities should be enjoined from further breaches, ordered to comply with their obligations to work toward satisfying the few closing conditions, and ordered to close upon satisfaction of those conditions.
Now, I’ve seen some people note that this whole lawsuit (and we’ll get to some of the juicier bits soon) is all about what a terrible person and business person Elon Musk is, and thus it seems weird that they’re then trying to force such a terrible and untrustworthy person to own the company. But that’s not how this works. This is Delaware Chancery Court and the main thing that matters is “what’s best for the shareholders” and if what’s best for the shareholders is forcing the incredibly short-sighted, impossibly impetuous, trolling billionaire to pay them a decent premium on their shares, then… that may be exactly what happens.
The rest of the lawsuit is just an account of basically every ridiculous stupid thing that Elon Musk has done through the course of this saga. It’s quite something laid out in black and white and it’s worth reading the whole thing. It goes through the twists and turns that show how much of this appears to be that the world’s richest man can’t bother with pesky little things like understanding the consequences of his own actions, and focuses on making huge bets based solely on his intuition and with little care for facts or details.
Just as one example, in his rush to close the deal, Musk agreed to a few clauses in the agreement that are just incredibly friendly to Twitter (and incredibly useful in this litigation):
The agreement was negotiated through the night and, in the process, became even more seller-friendly. Among the provisions not contained in Musk’s proposal but included at Twitter’s insistence were an undertaking by defendants, including Musk, to “take or cause to be taken . . . all actions and to do, or cause to be done, all things necessary, proper or advisable” to obtain the financing (already committed) to consummate the transaction, Ex. 1 § 6.10(a); a clear disclaimer of any financing condition to closing, id. § 6.10(f); and a right on Twitter’s part to request and promptly receive updates from Musk about his progress in obtaining financing, id. § 6.10(d). These provisions ensured that financing would be no obstacle to closing and that the company would have the right to stay informed of Musk’s progress in arranging his financing.
Twitter also notes (and this was new to me) that part of the agreement that they added (which Musk’s proposal did not have) was the right to hire and fire at all levels of the company between the announced deal and Musk taking over. Musk originally did not want that, but then agreed to it. This is extremely noteworthy, because Musk’s lawyers tossed in another Hail Mary pretextual argument that Twitter’s firing of a few top executives after the deal was announced somehow violates the deal. Yet, as Twitter is showing here, Musk agreed explicitly that it would not.
Also, it appears that the purchase agreement pretty much directly and somewhat explicitly excluded all of the reasons that Musk is now trying to lay out for voiding the deal:
The parties thus agreed that any circumstance affecting the market generally or other social media companies would not excuse defendants from closing. Nor would any circumstance arising from the existence or performance of the agreement, or from any communication by Musk, “including the impact of any of the foregoing” on any of Twitter’s relationships with, among others, customers. Likewise, matters that Twitter disclosed in sections of its SEC filings other than the “Risk Factors” and “Forward-Looking Statements” sections cannot constitute a Company Material Adverse Effect. And Twitter’s failure to meet financial projections will not excuse closing unless that failure results from an occurrence independently qualifying as a Company Material Adverse Effect (taking into account all of the express exclusions).
Also, he can’t even escape if his financing partners bail on him:
Notwithstanding anything contained in this Agreement to the contrary, the Equity Investor, Parent and Acquisition Sub each acknowledge and affirm that it is not a condition to the Closing or to any of its obligations under this Agreement that the Equity Investor, Parent, Acquisition Sub and/or any of their respective Affiliates obtain any financing (including the Debt Financing) for any of the transactions contemplated by this Agreement.
I mean, holy hell, Elon. How the fuck did you agree to sign this and then… get cold feet two weeks later? This is just astoundingly, embarrassingly bad. I know that your fans want to label you a super genius — and I sorta believed you were pretty damn smart myself until this whole debacle went down. Now you look like the kind of sucker who gets taken for a ride by street hustlers playing a three card monte.
Back to the details. Once again, the agreement makes clear Musk can’t back out by claiming Twitter didn’t share important information with him:
Nor is there any diligence condition. Indeed, each of Parent and Acquisition Sub represents that it “conducted, to its satisfaction, its own independent investigation, review and analysis of the business, results of operations, prospects, condition (financial or otherwise) or assets of the Company and its Subsidiaries,” and that, in determining to proceed with the merger, each “relied solely on the results of its own independent review and analysis and the covenants, representations and warranties of the Company” in the merger agreement. Id. § 5.11. Parent and Acquisition Sub further acknowledge that “neither the Company nor any of its Subsidiaries, nor any other Person, makes or has made or is making any express or implied representation or warranty with respect to the Company or any of its Subsidiaries or their respective business or operations, in each case, other than those expressly given solely by the Company in Article IV,” and they represent that in agreeing to the merger they were not relying on “any express or implied representation or warranty, or the accuracy or the completeness of the representations and warranties” in the merger agreement about Twitter and its business and its operations “other than those expressly given solely by the Company in Article IV.”
In other words, even if — as many Musk fans keep wanting to insist — Twitter misled the SEC (and there’s little to no evidence to support that claim), in the merger agreement Musk explicitly said that he didn’t rely on such statements in the first place, and thus it wouldn’t make any difference at all.
I mean, kudos to Twitter’s lawyers who put together this purchase agreement, because they appear to have anticipated every stupid trick that Musk would try to pull.
Now, as for the other information sharing bit — the pretextual nonsense where Musk pretends Twitter isn’t sharing the info it promised him and which he needs to close the deal — Twitter’s lawyers dismantle that rather aggressively as well.
On May 21, 2022, Twitter hosted a third diligence session with Musk’s team and yet again discussed Twitter’s processes for calculating mDAU and estimates of spam or false accounts. Twitter also provided a detailed summary document describing the process the company uses to estimate spam as a percentage of mDAU.
Defendants responded with increasingly invasive and unreasonable requests. And rather than use “reasonable best efforts to minimize any disruption to the respective business of the Company and its Subsidiaries that may result from requests for access,” Ex. 1 § 6.4, defendants repeatedly demanded immediate responses to their access requests. The scope of the requests and the deadlines defendants imposed on their satisfaction were unreasonable, disruptive to the business, and far outside the bounds of Section 6.4.
Twitter nonetheless continued to work with Musk to try to respond to the requests. It extended an ongoing offer to engage with Musk and his representatives regarding its calculation of mDAU, and held several more diligence sessions through the end of May. It also provided detailed written responses, including custom reporting, to his escalating requests for information.
On May 25, 2022, defendants’ counsel sent the first of a series of aggressive letters copying their litigation counsel at Quinn Emmanuel. This one falsely asserted that Twitter had “failed to respond to any” of defendants’ information requests and insisted that defendants be granted access to the firehose data so Musk could “make an independent assessment of the prevalence of fake or spam accounts on Twitter’s platform.” Though the letter called Twitter’s own spam detection methodologies “lax,” it identified no basis for that charge.
Nor, again, did defendants explain how fulfillment of the firehose data demand would further consummation of the merger or what basis they had to demand the right to “make an independent assessment” of the prevalence of false or spam accounts on the platform. Even assuming that was a proper purpose, reviewing the full firehose data would not result in an accurate assessment or mimic the rigorous process that Twitter employs by sampling accounts and using public and private data to manually determine whether an account constitutes spam — as Twitter’s representatives had already repeatedly explained to Musk’s team.
On May 27, 2022, Twitter responded by noting its weeks-long active engagement with Musk’s team and explaining that some of defendants’ requests sought disclosure of highly sensitive information and data that would be difficult to furnish and would expose Twitter to competitive harm if shared. After all, Musk had said he would do one of three things with Twitter: sit on its board, buy it, or build a competitor. He had already accepted and then rejected the first option, and was plotting a pretextual escape from the second. Musk’s third option — building a competitor to Twitter — remained. Still, Twitter again responded constructively and reiterated its commitment to work with Musk’s team to provide reasonable access to requested information.
On May 31, 2022, defendants lobbed another missive, again falsely asserting that Twitter had “refused” to provide requested data and that the company’s spam or false account detection methods were “inadequate.” The letter claimed Musk was willing to implement protocols to protect against “damage or competitive harm to the company.”
On June 1, 2022, Twitter responded by refuting that it had “refused” provision of data, demonstrating that, to the contrary, it had been working with Musk’s team to honor their requests within the bounds of the contract. To help set the protocols Musk had said he was willing to honor, Twitter asked a series of questions directed at how the data would be used and by whom, and how it would be protected.
Defendants’ response on June 6, 2022 made no effort to answer those questions or identify data-protection protocols; instead, it accused Twitter of breach and advanced a false narrative that Twitter had been stonewalling Musk’s requests. Musk publicly filed the letter, which repeated his baseless and damaging charge that Twitter had “lax” detection methods. He included none of Twitter’s correspondence in that filing and omitted all details about the information Twitter had provided. He thus continued to present the public with a misleadingly incomplete narrative about his communications with Twitter, with equally misleading implications about the likelihood that the merger would be completed and about Twitter’s operations.
Steadfast in its commitment to consummate the merger, Twitter continued to try to get Musk’s team what it demanded while safeguarding its customers’ data and harboring very real concerns about how Musk might use the data if he succeeded in escaping the deal. On or about June 9, 2022, Musk’s counsel indicated that granting access to 30 days’ worth of historical firehose data would satisfy Musk’s request for the firehose data. So, on June 15, the company gave Musk’s team secure access to that raw data — about 49 tebibytes’ worth. It did so even though the merger agreement did not require the sharing of this information.
It goes on and on for a while. Basically, just as we presumed was happening from the outside, Musk and his lawyers just kept asking for more and more stuff, much of it useless or non-existent, and Twitter tried to do its best, and Musk just kept saying “not enough” which was basically exactly what appeared to be scripted out by his lawyers as the “excuse” to get out of the deal.
Also notable is that throughout all this Twitter tried to set up meetings with Musk to explain in detail how it calculates spam. And Musk basically blew them off — against demonstrating how this was nothing more than a pretextual excuse to bail on a deal he had promised.
Meanwhile, Agrawal and Twitter CFO Ned Segal had been trying to set up a meeting with Musk to discuss the company’s process in estimating the prevalence of spam or false accounts. On June 17, 2022, Segal proposed a discussion with Musk and his team to “cover spam as a % of DAU.” Musk responded that he had a conflict at the proposed time. When Agrawal sought to reengage on the matter, Musk agreed to a time on June 21, but then bowed out and asked Agrawal and Segal to speak with his team not about the spam estimation process but “the pro forma financials for the debt.”
This entire complaint is basically five dozen pages of how untrustworthy Musk is, and how he obviously wants to go back on his deal and is trying to come up with any excuse to do so. It seems highly likely that a judge reading through this will see how Musk’s position is nonsense.
Among the other eye opening bits in the filing: even as Musk claims the loss of top employees is one reason to bail on the deal, the complaint notes that Twitter sought Musk’s approval on an employee retention plan — and Musk refused to give it!
Most notably, Musk has unreasonably withheld consent to two employee retention programs designed to keep selected top talent during a period of intense uncertainty generated in large part by Musk’s erratic conduct and public disparagement of the company and its personnel.
During negotiation of the merger agreement, Twitter had sought Musk’s consent to a broad retention plan. Musk’s team deferred decision on the matter; the plan Twitter proposed was detailed, and time for negotiation was short. But Musk indicated he was open to further discussion.
During a May 6, 2022 post-signing diligence session, Twitter management again broached the subject of retention, and Musk was noncommittal. He suggested the matter be tabled pending further clarity on the expected interval before closing the deal.
Over the weeks that followed, Swan discussed with Twitter management a narrower retention plan than the one that had been discussed during the merger agreement negotiations. Consistent with those discussions, on June 20, 2022, Twitter sent defendants a formal request for consent to two tailored employee retention programs that had been vetted by the board and its compensation committee with the assistance of an outside compensation consultant.
Musk initially failed to respond at all to the June 20 consent request. (It would soon become clear that he had fired Swan.) After a follow-up request for consent, Musk’s counsel stated tersely that “Elon is not supportive of this program and has declined to grant consent for it.” Twitter offered to arrange a meeting between Musk and Lane Fox to explain the importance and utility of the proposed programs. Musk’s counsel repeated that Musk “doesn’t believe a retention program is warranted in the current environment,” and said Musk was unwilling to consider the advice of compensation consultants, but left open the possibility of speaking with Lane Fox.
On June 28, 2022, following further stonewalling from Musk’s counsel, Twitter urged that a discussion would be fruitful. After initially suggesting Musk might be “amenable to a call next week,” Musk’s counsel replied, “Elon already gave his response but I’ll remind him of Martha’s request for a call.” The call never happened — Musk has continued to duck it — and neither retention program has been implemented due to defendants’ unexplained and unreasonable withholding of consent. Employee attrition, meanwhile, has been on the upswing since the signing of the merger agreement.
Given all that, for Musk to claim that employees leaving was a reason he’s backing out of the deal is just so so incredibly rich. This entire complaint is basically showing that everything Musk does is in bad faith. Honestly, reading this, it’s difficult to see why anyone should ever trust Musk in any business deal ever again.
The lawyers even included some late breaking tweets, in which Musk posted ridiculously laughable memes implying that this whole mess was all part of his plan to force Twitter into court to reveal the information he wanted revealed. But, in doing so, he’s effectively admitting that this entire thing was pretextual bad faith actions — which… um.. does not make him look good. Especially not in the eyes of a court that deals with business disputes all the time.
In the early morning of July 11 (Eastern time), Musk posted Tweets implying that his data requests were never intended to make progress toward consummating the merger, but rather were part of a plan to force litigation in which Twitter’s information would be publicly disclosed:
For Musk, it would seem, Twitter, the interests of its stockholders, the transaction Musk agreed to, and the court process to enforce it all constitute an elaborate joke.
There’s more in there, but this is an incredibly strong filing in multiple ways. It’s clear and direct. It lays out the timeline of what happened, in a manner that shows repeated actions by Musk that appear to be in bad faith. It demolishes each of the pretextual excuses for getting out of the deal, and provides a strong narrative explaining why Musk is acting this way.
Musk has good lawyers too, but they’ve got very, very little to work with here.
Honestly, the real question is how much Musk is willing to roll the dice on $44 billion. He’s gotten lucky on so many gambles in life before, it wouldn’t surprise me to see him just keep fighting this case, even with an extremely high probability of a pretty significant loss.
It still strikes me that the most likely outcome is that Musk and Twitter come to an agreement on some number that Musk has to fork over to settle this and walk away from the deal (while getting Twitter to drop the lawsuit). That result is probably in Musk’s best interest, as there is a very real possibility that the court will order him to pay the full $44 billion (and it’s also possible his financing partners back out after seeing all this — but that won’t matter, Musk will still be on the hook for the amount).
Honestly, if Musk can get out of this while paying “only” $1 billion, or even $5 billion, it might be a hell of a deal for him, and much better than the alternative. And, that’s not even getting into the inevitable shareholder lawsuits against Musk for his actions that they can credibly argue torched Twitter’s value over the last few months.
None of this is a slam dunk, but it’s difficult to read this filing, which confirms and adds to much of what we’ve reported over the last three months, and see anything other than that Musk is in deep shit right now from all of this.