Musk Tries, Tries Again With Yet Another Argument For How He Can Get Out Of Buying Twitter: Mudge’s Severance Package

from the try-try-try-try-try-again dept

I mean, of course. On Friday Elon Musk terminated his Twitter purchase for the third time. In yet another termination letter sent to Twitter, he claims that Twitter’s severance agreement with Peiter “Mudge” Zatko was a violation of the purchase agreement.

Some background: you already know that Musk signed a purchase agreement to buy Twitter. You already know that within a couple weeks he got cold feet and desperately started seeking any excuse to get out of the deal. You already know that there wasn’t a good excuse to get out of the deal because Twitter hired good lawyers, and Elon Musk isn’t good at details (and, as Matt Levine notes, doesn’t seem to understand what a merger agreement is though, the more likely truth is that he knows what it is, he just assumes that as the world’s richest asshole, the rules that apply to normal people, like living up to the binding contract you signed, don’t apply to him). You already know that Musk hired very expensive lawyers to come up with any pretext they could find as an excuse to get out of the deal, and that Twitter then sued him over this.

Again, the pretext they came up with is not, as you may have heard, that there is too much spam on the site. After all, Musk said that the “too much spam” thing was why he was buying Twitter in the first place. Musk has made a huge deal out of Twitter’s SEC reports about less than 5% of its monetizable daily active users (mDAU) being nonsense, but that’s because he doesn’t understand (or is simply pretending to be that stupid for some reason) that mDAU is counted after Twitter already excludes all the spam it can find.

The actual reason his very expensive lawyers came up with for getting out of the deal was that Musk’s faked “concern” over spam in the mDAU enabled them to request more and more documents from Twitter because the purchase agreement included an information rights clause, saying that Musk had the right to gather whatever information from Twitter was necessary to close the deal. Musk then had his lawyers request ever more ridiculous information about the spam/mDAU stuff, to the point that Twitter finally said (paraphrasing slightly) “dude, what the fuck, some of what you’re asking for doesn’t exist, and none of it is necessary for closing the deal.”

And, based on that, Musk claimed that Twitter breached the information rights provision and thus he could get out of the deal. It’s a weak argument. An astoundingly weak one. And so far that’s reflected in how the case is going for Musk (poorly).

But, Musk is not one to give up. So, as we noted when former head of Twitter security Peiter “Mudge” Zatko filed his whistleblowing complaint, it potentially opened up a new avenue for Musk to whine that the agreement was breached (though not for the reason that most of the gullible media suggested). Though Mudge’s report has some nonsense about spam in the mDAU, that actually confirmed Twitter’s legal argument, not Musk’s. While the media and a bunch of Musk’s fans bought into the claim that Mudge’s report helped him on the spam issue, Musk’s very expensive lawyers knew better.

Instead, they filed a second termination letter, this time about the other stuff in Mudge’s whistleblowing report effectively arguing that his claims about security problems, fraud, and some other stuff represented a material averse event that allows Musk to escape the deal. That’s still a long shot (a very long shot), but it’s honestly a better argument than the information rights/spam in the mDAU nonsense.

Last week, one of Musk’s small (very small) victories was that the Delaware Chancery Court allowed Musk to amend his complaint with the Mudge stuff. In some ways, it’s an even smaller victory than most people think, because if the Chancellor had rejected it, he could have tried to appeal, whereas now he’s stuck before the Chancellor who, to date, has not been buying Musk’s bullshit.

Anyway, in the same hearing where this was debated, there was something that was discussed which was a bit confusing: claims of a large multi-million dollar payout to Mudge as severance. Later in the week it came out that the company had agreed to a $7 million settlement with Mudge, after he claimed that his firing violated his contract with the company. The $7 million severance payment closed out that dispute, though Mudge filed the whistleblower complaint days later.

So, now Musk has filed this third termination letter with Twitter, insisting that Musk believes the first and second termination letters are sufficient, but, you know, just in case. The argument is pretty straightforward. It claims that the merger agreement would not allow any severance packages other than those in “the normal course of business,” and that the Mudge agreement violated that:

In Section 6.1(e) the Merger Agreement, Twitter covenanted that between signing and closing it would not “except as required pursuant to existing Company Benefit Plans . . . grant or provide any severance or termination payments or benefits to any Company Service Provider other than the payment of severance amounts or benefits in the ordinary course of business consistent with past practice and subject to the execution and non-revocation of a release of claims in favor of the Company and its Subsidiaries.” The definition of “Company Service Provider” includes Twitter’s former employees. Under Section 7.2(a) of the Merger Agreement, Defendants are not obligated to close if Twitter has not “performed or complied, in all material respects, with its obligations required under this Agreement.”

On June 28, 2022, Twitter entered into a separation agreement with Peiter Zatko under which Twitter made severance payments to Zatko and his counsel totaling $7.75 million. Twitter did not seek Defendants’ consent under Section 6.1(e) before making this payment nor was this payment disclosed to Defendants. In fact, Defendants only learned of this payment when Twitter filed the separation agreement with the court on September 3, 2022. This severance payment violated Section 6.1(e) and cannot be cured. Defendants are thus not required to close under Section 7.2(a) and have an additional basis to terminate the Merger Agreement if the Musk Parties’ termination of the Merger Agreement pursuant to the July 8 Termination Notice and the August 29 Termination Notice is determined to be invalid for any reason. Because Twitter has taken the position that the Merger Agreement remains in effect, the Musk Parties hereby provide this additional notice of termination of the Merger Agreement pursuant to Section 8.1(d)(i) thereof on the basis of the facts set forth above. For the avoidance of doubt, these bases are in addition to, and not in lieu of, the bases for termination identified in the July 8 Termination Notice and the August 29 Termination Notice.

Again, this is a reason. It’s not necessarily a good one. But, you know, it’s there. I imagine Twitter will argue that this is “consistent with past practice” and was done “in the ordinary course of business.” And that will be that.

Meanwhile, Elon also did file his amended complaint, though under seal. I imagine we’ll see it at some point next week. It’s possible it will already include stuff about the severance package because I doubt Musk wants to ask for yet another chance to amend, but these days, you never know…

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Comments on “Musk Tries, Tries Again With Yet Another Argument For How He Can Get Out Of Buying Twitter: Mudge’s Severance Package”

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19 Comments
That One Guy (profile) says:

Re: Tell it to Musk, not TD

You should tell Musk and his lawyers then, because that’s not what they were demanding.

Musk then had his lawyers request ever more ridiculous information about the spam/mDAU stuff, to the point that Twitter finally said (paraphrasing slightly) “dude, what the fuck, some of what you’re asking for doesn’t exist, and none of it is necessary for closing the deal.”

This comment has been deemed funny by the community.
Anonymous Coward says:

You might forgive Musk for thinking this severance was not in the normal course of business. To him, a seperation involves a firing, spies and lawyers sent after terminated individuals, Twitter tirades against said individuals, and probably lawsuits filed.

You can see where he might be confused.

Rekrul says:

I’m not a lawyer, so I’m unclear about something: Musk signed a contract to buy Twitter and now he wants out of that contract. I know that when someone breaks a contract, there are legal ramifications, but what are they?

Does Twitter just sue him? Or does some court force him to go through with the deal and he gets Twitter forced upon him, even if he no longer wants it?

The latter doesn’t seem like a very good outcome for Twitter. Basically, I’m wondering why they haven’t just gone ahead and sued him for breach of contract.

Anonymous Coward says:

Re:

Does Twitter just sue him? Or does some court force him to go through with the deal and he gets Twitter forced upon him, even if he no longer wants it?

That’s essentially what’s going on now in the Chancery Court. Twitter is suing to force Musk to close the deal, and Musk is arguing that he shouldn’t have to.

Christenson says:

Re: Re: Twitter vs Musk suit

Twitter @chancery_daily has been following and analyzing this suit.

There’s a new filing from Twitter today asking for discovery sanctions/adverse inferences because they claim musk has been hiding the ball with discovery responses.

This, and some previous rulings from the same judge in Delaware Chancery court make things look a lot like Twitter is going to win big — possibly enforcing the entire contract for Musk to purchase twitter at the original high price.

Here’s an informative link with the new motion from Twitter:
https://twitter.com/chancery_daily/status/1569740214200897539

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