Saturday, May 21, 2022
The world seems to be fascinated with Musk’s antics in connection with the Twitter acquisition (I have to pay attention; it’s my job), and in particular, a question that seems to be coming up a lot is, “Why isn’t the SEC doing anything?” The answer, of course, is that none of this has anything to do with the SEC. Yes, sure, Elon Musk didn’t file a form on time, and, now that we have the preliminary proxy, it seems the forms he did file were false in that they claimed he had no designs on a merger when in fact he absolutely did have designs on a merger, but delayed 13D/13G filings have never been a high priority for the SEC and in most cases have been met with a small fine. The rest of it – Musk’s arguable violation of the merger agreement by tweeting confi info and disparaging everyone in sight, and his fairly transparent attempt to back out of his obligations with pretextual excuses about spambots – simply are not the SEC’s bailiwick. That’s Delaware’s problem, which dictates the fiduciary duties of Twitter board members, and whose law governs the merger agreement. And Delaware doesn’t act sua sponte, like a regulatory agency; it responds only when someone brings a lawsuit. Which Twitter may or may not ultimately do. (Its shareholders certainly will; one suit’s brewing, more will likely be forthcoming).
But there’s a deeper issue here, which is that the complete failure of anyone to rein Musk in really undermines the perception that there is a general rule of law that applies to everyone. That’s why everyone’s asking why the SEC isn’t acting, even though this isn’t really the SEC’s responsibility to address.
I mean, sure, you kind of know in a cynical way that rich people play by their own rules, but there’s a difference between believing that intellectually and viscerally experiencing it, day by day, as it plays out in Twitter.
And maybe that perception is misguided in this case – as I just said, there really isn’t a basis for any regulatory authority to get involved here, though the SEC could create headaches by demanding more disclosures in the proxy – but Musk’s brazen disregard of his contractual obligations almost certainly flows from his history of ignoring rules and experiencing no meaningful consequences. And of course, the more he does it, the more he develops an army of admirers who become less likely to hold him to account in the next iteration of the game.
Uninformed observers may be misunderstanding the specifics, but they’re right on the general principle. Like, I don’t think it’s entirely coincidental that Musk is publicly defying obligations under Delaware law right after a Delaware court said – in practical effect – that he is a business genius who is largely entitled to skip all the niceties of Delaware procedure.
And that’s the danger of each individual player – a Delaware court, a particular regulatory agency, a merger partner – each deciding that Musk is too irascible, too smart, too wealthy, too talented, to rein in. It collectively communicates a very specific lesson about who has to comply with the law, and who doesn’t. That harms everyone, but no one actor has an incentive or even the jurisdiction to address it.
That said, on a long enough timeline, well....