The entire world is about to get a lesson in Revlon

is something I said on Twitter in connection with l’affaire de Musk. 

What I meant by that is not the specific legal rule of Revlon regarding directors’ fiduciary duties, but the orientation of Revlon, meaning, shareholder wealth maximization as the raison d’etre of corporate law, with the recognition that once a company is sold for cash, it is effectively dead, at least as far as its former investors are concerned.  It had no purpose other than as a vehicle for their wealth, and, once liquidated, that purpose is fulfilled.

Much of the commentary regarding the Twitter dispute – usually, though not always, coming from pundits outside the corporate space – is genuinely disorienting for a corporate law person, because it treats Twitter as an entity that exists as the collective sum of its stakeholder interests, rather than as an avatar for investor interests.

Which is a totally normal, human way to think about the problem from the perspective of a citizen or as a person who inhabits this planet, but is almost entirely illegible from the perspective of Delaware corporate law.

To wit:

 

The real point of the Musk/Twitter litigation is over the size of the breakup fee, right? I hope it isn’t actually the Twitter board’s goal for the company to be owned by an unwilling buyer.

— Matthew Yglesias (@mattyglesias) July 13, 2022

Yes, that one hundred percent is the goal, because $54.20 is a really big number for Twitter’s investors. It didn’t look so at the time (hence Musk’s attempt to back out), but given where we are now, it would be a windfall.  Why should the board care about whether a buyer is willing or unwilling? Once the company is sold, it is dead (from the perspective of the now-former board members and now-former stockholders).

 

no matter what happens in Delaware, the damage is done. @MikeIsaac and I talked to experts in advertising, finance, disinformation and current & former Twitter employees about the havoc this deal-making has caused. https://t.co/mgT4OkuudD pic.twitter.com/OcAfMOpxv3

— kate conger (@kateconger) July 11, 2022

If Twitter wins in Delaware, it doesn’t matter what damage was done, because the shareholders have got their $54.20.

The board’s lack of conviction in the company’s long-term future will linger over employees, partners and shareholders regardless of the outcome with Elon.

(source)

If the outcome is Elon is forced to buy the company, it doesn’t matter what the former board’s view of the company’s future was.  Elon is the board now, and Elon is the shareholders.

If Mr. Musk doesn’t want to buy Twitter, it doesn’t make much sense for a court to make him do so. Twitter might be worse off under his ownership at this point, a fate Twitter’s board is legally obligated to try to avoid.

(source)

If Musk buys the company, the board is not there any more.  The shareholders are not there any more.  They do not care if Twitter is “worse” under his leadership; the concept of it being “worse” doesn’t even read because the company will no longer be owned by public investors.  “Worse” does not have much of a definition.

What company wants to be owned by someone who does not want it?

(source)

Twitter does not have a preference; Twitter is not a person.  If Musk loses in court, the current shareholders will be bought out and they are unlikely to have sentimental feelings about what happens to the company after that.

People do deals to do the deals. They don’t do deals to litigate, they don’t do deals to collect breakup fees. They do the deal because they thought the deal made sense….Who’s gonna really win here is the lawyers.

(source)

I am sure the lawyers will win, but I really must emphasize that if Twitter wins, Twitter shareholders will get $54.20 per share for stock currently trading at around $36 (a figure which itself is probably inflated somewhat by the possibility that Musk will be forced to make good on his offer), and they will have done so without personally having to sit for depositions or be pilloried on Twitter itself.  The shareholders, therefore, would win.

I think [the board is] scared, and they want to get out of this. They want to get him away from them. What I’d ask is for him to sell back his shares. He sells his shares, maybe at a loss, pays the billion dollars and goes. I would let him just move. I know we’re like “justice against Elon,” but I think the board wants to get out of this. Employees are pretty pissed, too, I’ll tell you that….. I don’t think they want this to go into court by any means at all. It’s not good for anybody….Ultimately, you have to do a cost-benefit analysis, and there’s no benefit from fighting with him publicly. There isn’t.

(source)

I claim no insight into the personal feelings of the board members, their fears, their hopes, their dreams, but their legal obligation here is to maximize stockholder wealth, and though they could, consistent with those duties, decide that in the long term Twitter is more valuable as a standalone company than the $44 billion Musk agreed to pay right now, that seems … unlikely … and so their legal obligation is to pursue that $44 billion.  And if investors can win in a courtroom, there is absolutely a benefit to fighting with Musk about it.  The $1 billion dollar break fee won’t begin to compensate the company for the damage Musk has done, but more importantly, $1 billion is less than $44 billion.

I am being snarky here but I do need to emphasize that I don’t blame most of these commenters for thinking about Twitter this way; it’s the default, almost natural, way to approach the dispute.  I teach Revlon; I know from experience I have to train students to think exclusively in terms of shareholder wealth; it does not come intuitively.  And that is why, for example, a lot of commentary does not seem to understand that Twitter “settling” for $1 billion but shedding a troll is a loss for Twitter and a win for Musk.  It’s pocket change for Musk and far, far less than what Twitter’s shareholders are owed.

It's not that Delaware courts are literally indifferent to the plight of other constituencies; it’s simply that they don’t consider them to be the objects of corporate law.  I note, for example, that every modern Caremark opinion begins with an acknowledgement of the vulgarity of viewing horrible tragedies solely through the lens of their effects on stock prices, before going on to do just that.

And it’s good, in a way, that this public conversation be happening right now, because we are in the midst of a reinvigorated debate about whether corporate law should have a shareholder-only orientation, and nothing could be more salient in terms of demonstrating what that means.   And what that means is, “Twitter” is not an entity with independent interests; the interests that legally matter are those of shareholders; those interests are legally presumed to include only Twitter’s monetary value, 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.”

That said, as I’ve repeated in other spaces, that does not mean a Delaware court will be indifferent to the equities of the situation.  Indeed, the standard for granting specific performance and forcing Musk to buy the company requires that the order “not cause even greater harm than it would prevent.”  Though Delaware courts have ordered mergers to be completed by unwilling buyers in the past, the most comparable precedent is In re IBP Shareholders Litigation, where then-Vice Chancellor Strine considered the social equities of foisting a merger on an unwilling buyer (although it should be noted that in that case, the target shareholders could receive stock in the combined entity rather than cash, and so the target investors also had a continuing interest in the successful functioning of the new company.)   It would be irresponsible for a Delaware court to entertain an order of such enormous political and social consequence without considering the effects on the broader society.  But the critical point here is that consideration of these collateral constituencies would be a departure from Delaware’s usual orientation, not the norm.  And the countervailing consideration will be that not requiring Musk to buy the company would call into question the basic stability and credibility of Delaware corporate law and the Delaware legal system – which is valued precisely because these concerns are generally absent.