Thursday, July 14, 2022
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.
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.
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.
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?
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.
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.
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.
Ann, I think you have overstated the Revlon case here. First, Revlon can be distinguished on its facts. There was an auction. In order to avoid Pantry Pride, Revlon made a deal with Forstmann. The company was going to be sold, either to Forstman or to Pantry Pride. No such auction here. If the deal fell through, Twitter would continue as a corporate entity. Unlike Revlon, the board's primary duty, ON THE FACTS, had not become that of an auctioneer responsible for selling the company to the highest bidder. Second, there is a pretty good argument that very few people (including me, as I predicted to a number of my students) thought the deal would ever get closed. So the reality is that Twitter was never "dead" to the shareholders. If anything it was a flyer to get Musk to put up or shut up, and if he didn't put up, then Twitter would have exactly what it has now: a monster lawsuit with a floor of a billion dollars in damages and more to the extent it can prove injury to the corporate enterprise.
Posted by: Jeff Lipshaw | Jul 15, 2022 5:47:55 AM
One other thought. Revlon defined the bounds of the Unocal doctrine which set the standard for defensive measures - those reasonable in relation to the threat posed are assessed afterward under the BJR. So if Twitter had gone to the mattresses in fighting off Musk's bid, Unocal would have said that the board should undertake an analysis of the takeover bid and its effect on the corporate enterprise. "Examples of such concerns may include: [among other things related to the offer itself], the impact on 'constituencies' other than shareholders (i.e., creditors, customers, employees, and even the community generally), [and] the risk of nonconsummation." To my earlier point, without an auction and the certainty of sale, it seems to me that BJR will govern the Twitter board's decision whether to press the Musk contract to its logical LEGAL outcome, or otherwise to protect the corporate enterprise.
Posted by: Jeff Lipshaw | Jul 15, 2022 5:59:28 AM
Hi Jeff. You're misunderstanding my point, I think. I'm not talking about the specific requirements of Revlon; I'm talking about the idea that the board must maximize shareholder wealth and shareholders don't care what happens once the firm is sold. I 100% agree with you that earlier in this saga, the board had no obligation to accept Musk's offer - I said something similar in an earlier post (https://lawprofessors.typepad.com/business_law/2022/04/delaware-the-neutral.html). But that isn't where we are now. Where we are now is that there is a signed deal and the board must try to enforce it, unless, as I said, it in good faith believes that financially shareholders would do better if the firm continues. If the firm continues, then, yes, stakeholders matter to the extent they contribute to shareholder wealth (a descriptive statement about Delaware law, not a normative claim). But it does not, at this time, seem that the board or very many other people believe that Twitter's long term value can exceed Musk's price, and that makes it necessary that the board at least try to enforce the contract as written so long as the litigation risks justify it (and right now they surely do).
Posted by: Ann Lipton | Jul 15, 2022 6:16:39 AM
I agree with Jeff that Ann has misstated the application of Revlon here. A single erratic buyer entering a merger agreement with Twitter does not present an inevitable break up of Twitter on all fours with Revlon. I don’t think it particularly matters whether Revlon applies as a grant of specific performance - which will only be the first move in a very long and drawn out battle to have that affirmed on appeal and then try to enforce it (good luck) - is entirely possible without ever citing Revlon.
Posted by: J.B. Heaton | Jul 15, 2022 6:34:15 AM
so obvious and common sense. I was shocked to see those comments.
but apparently there are some illogical human institutions which you know better than me!
btw, hypothetically if we could assess a current market value for Twitter stock, the court could simply order musk to pay the price difference. but this isn't practical I think
Posted by: Jazi Zilber | Jul 15, 2022 6:39:49 AM
Jazi, no because that would be a damages remedy and those are limited in the merger agreement to at most $1 billion. Specific performance is the only path to realization of the premium.
Posted by: J.B. Heaton | Jul 15, 2022 6:51:32 AM
The problem here is that the former Delaware judge went on CNBC and said that it is "more likely" that monetary damages would be assigned. If that's the case, how in the world is a judge going to assign the proper monetary damage?
From a shareholder perspective it should be $54.20 minus the current market value of TWTR. But the judge might say it's $54.20 minus the "unaffected price" - even though the market has lost considerable value since that unaffected price was a reality.
So my q... what if they assign monetary damages? How would they assign that?
Posted by: Pardis | Jul 15, 2022 8:10:28 AM
Also, for what it's worth, the crunch here, in terms of the board's and management's fiduciary obligation, will be the extent to which they pursue the ultimate and logical outcome of the litigation, or decide to settle for something short of that, say, a payment in excess of the $1 million termination fee in lieu of specific performance. I go back to the 2006 Disney opinion on the decision of Eisner and Litvack that there was no basis for concluding that Ovitz could be terminated for cause, and thus negating his $140 million severance payout. I am sure that good lawyers could have put together a defensible position vis a vis Ovitz that would have created enough litigation risk to knock off a chunk of the severance that would have justified the legal fees in doing so. That is really the nub of the issue here - will a decision to end the litigation against Musk short of a binary "buy-don't buy" outcome violate the Twitter board's duty to the shareholders? I have a hard time seeing any standard here other than the business judgment rule....
Posted by: Jeff Lipshaw | Jul 15, 2022 8:33:12 AM
How much, if any, would you anticipate Chancellor McCormick to tip her hand on Tuesday's hour and a half hearing on expedition? Will this be a (boring) scheduling session or a (possibly elucidating) chance for her to comment on the substance of the briefs she gets by Monday? Thanks!
Posted by: Chris DeMuth Jr | Jul 15, 2022 11:19:42 AM
Chris: not really sure until I see the parties' papers on the expedite motion. If they have wildly different views of how the case will unfold then she may have to weigh in.
Posted by: Ann Lipton | Jul 15, 2022 11:26:34 AM
So the interests of users of the App have no cognizable interest? At this point Twitter feels like a public utility that a court of equity could hinge allowing the sale to proceed on assurances that the platform will remain open within reasonable limits (controlling for libels, criminal schemes, etc.)
Posted by: George Conk | Jul 17, 2022 4:18:39 AM
Hi George - the only role for consideration of consumer interests might come into this balance of harms aspect. It's hard to imagine the court not only ordering a sale, but also ordering (and therefore committing to oversee) aspects of how the business is run afterwards. Who would have standing to bring a claim if the order is violated? etc. Plus, that would be forcing Musk into a deal that he never agreed to - and the point of a court ruling would be to enforce the agreement.
Posted by: Ann Meredith Lipton | Jul 17, 2022 7:51:11 AM
The shocking part is that while the rest of your commentator quotes are by non lawyers, this particularly stupid quote is actually by a UChicago law professor. "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."
Posted by: James Lastname | Jul 14, 2022 8:43:58 PM