Twitter sued Elon Musk after he tried to renegotiate his $54.20-per-share purchase agreement, and the Delaware court has now heard the billionaire’s case. The trial will begin in October, rather than Musk’s preferred date of February. In the months since he struck an agreement to acquire the company at $44 billion in April, he’s been looking for a good reason not to buy it.
Musk is expected to go to trial with around three ways out of buying Twitter, as there isn’t much time left to put up a convincing excuse. Twitter’s compliance with his information demands on the matter and a nominal concern with phony accounts are more than likely a bunch of bullsh*t. The Chancery court in Delaware, which will hear this case and set a lot of American corporation law, is unlikely to take a position on either of them, for a variety of reasons.
However, there is a third option that has emerged in the last few days. As part of his purchase endeavor, Morgan Stanley and Andreesen Horowitz, a venture capital firm, have committed to contribute roughly $20 billion. For one thing, if Musk’s Twitter backers decide to stop donating money, he won’t be obligated to complete the acquisition. Of course, that would make his day. As a result, Twitter’s legal team has issued dozens of subpoenas to these companies, hoping to prevent them from scuttling a deal that Twitter’s board of directors is eager to complete.
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Musk and his backers aren’t going to be able to just wave their hands and make the deal go away. I spoke with Columbia Law School professor Eric Talley, who specializes in corporate law, governance, and finance, on Thursday to help me work out this wild card in Twitter v. Musk. An edited transcript has been provided for your convenience.
Theodore Kirshner: It appears that Elon Musk and his legal team have at least three possible ways out of the purchase of Twitter. You have your bot. His information demands have not been met to his satisfaction, he claims. Third, there’s the question of how he’ll pay for it all. Does he have any further plans to try to get out of the contract in Delaware that you know of?
Not really. I think you’ve covered the most important ones, though. This one is unique in that it doesn’t allow him to walk away from the deal. It limits Twitter’s recourse against him in the event of a genuine funding failure. He could just walk away from the other two.
In contrast to the previous one, this one reads, “No, you will be in breach of contract. Financing is not explicitly required to close this deal. The sale could still be closed even if you don’t acquire finance, which is why you broke your contract. You could still break the contract, but your only recourse would appear to be money damages,” according to the document.
“Breakup fee” of $1 billion is a common topic of conversation. And if the banks leave, Musk would still be in breach of his contract, but he would only have to pay this amount instead of buying Twitter for $54.20 per share and almost $44 billion in total. Is that what you’re saying?
That is exactly right. If the banks go, the decision to leave cannot be coached if this is to work as I believe he intends it to in the long run. So it can’t be a result of inadvertent self-destructive behavior. When he’s been so forthright and public about his reservations about the deal, it’s a smart move to try to play this card.
In this wave of subpoenas to Musk’s investors in the deal, do you believe Twitter is looking for that information? Is there any evidence that he’s giving them orders to sabotage him?
There are generally three things they’re looking for. There are a few questions that need to be answered, the first of which is: Is there any evidence of Musk or Team Musk having spoken to these lenders or that the lenders have spoken with one another indicating that they are ready to pull the plug on the project? If this is the case, then the evidence points to his deliberately seeking to undermine the deal, which is what he’s obligated to do. As a result, I believe the first item on their shopping list will be food. As a side note, lenders’ lack of transparency about their concerns regarding bots is also a problem. When it comes to the bot issue, if lenders hadn’t expressed their concerns internally, then that dog that isn’t barking may potentially serve as evidence that, yes, this is all artificially produced by Mr. Musk. What it doesn’t say can be just as effective as what it does, and that’s something to keep in mind.
Third, I believe that the main lenders conducted their studies of Twitter valuation and risk exposure. And therefore, surely, that would be evidence of banks as well: It appears that you are concerned about the deal’s capacity to be financed, but you should look at your value judgments on Twitter and the stress testing that you conducted on it, and it doesn’t appear that there is any cause to be concerned about that.”
If I had to group the Twitter attorneys’ most important targets, they would fall into one of these three categories.
Since this arrangement was struck in April, there has been some analysis that demonstrates that the banks have their financial reasons to walk away: They would avoid losing money. In addition, if the banks want to continue doing business with the world’s richest man, it appears like helping him torpedo the sale could be beneficial to that relationship if they want to be engaged in a SpaceX IPO or similar ventures with Tesla. What are the motivations of these people? Are there any grey areas in terms of legitimate reasons for banks to walk away because of these incentives? ‘
In these kinds of scenarios, I think there’s a lot of room for ambiguity. Before, the courts in Delaware had to deal with buyers who claimed that something went wrong because someone they worked with refused to do something that was required of them, such as extending credit, issuing a solvency certificate, or issuing a tax opinion on the deal’s tax status. The courts in Delaware have dealt with these kinds of cases in the past. This transaction can’t go through since we didn’t receive X. This is a common refrain in the legal precedents. Finances may be a factor in this situation. The contract may be taken to mean that lenders could pull the plug if an independent reason for funding failure arises, which is exactly what I believe it implies.
Tulane University law professor Ann Lipton parses Elon Musk's counterclaims in the case against Twitter in regards to the $44 billion merger agreement and offers signs to look for in the countdown to the Oct. 17 trial date https://t.co/50tdOJzPAk pic.twitter.com/j5Nv59vNXA
— Reuters Legal (@ReutersLegal) August 9, 2022
It’s not a major adverse effect—that is, a change in Twitter’s commercial situation that would invalidate the deal—for Elon or the banks?
So if the financing arrangements simply state, “We are going to repeat whatever the definition is in the ultimate merger agreement of a major adverse effect, which it appears they do.” It’s a bit vague, and the only information we have comes from the contract as a whole. But if that’s what it appears to be, their ability to walk away is only as great as that of Tesla CEO Elon Musk. An MAE is specified in the merger agreement in a way that doesn’t include market volatility. It is possible that a big market shift could lead to a lender or an agent for lenders refusing to give a solvency certificate in principle