Twitter and Tea Leaves

As the world watches this unfold, I figured I’d blog this week to make a point I’ve expressed in other spaces (Twitter, etc), but I haven’t articulated here.

Where we are in this saga:  Musk sent a letter to Twitter on July 8, publicly filed with the SEC, purporting to terminate the merger agreement due to what he claimed were three contract breaches by Twitter.  First, Twitter falsely represented the amount of spam/bots on the platform; second, Twitter failed to provide information to Musk that was necessary to consummate the transaction (i.e., information about the amount of spam on the platform); third, Twitter failed to operate in the ordinary course by instituting a hiring freeze and laying off some employees. 

Twitter filed a lawsuit against Musk on July 12 seeking specific performance, arguing that it had not breached the agreement and that Musk, himself, was in breach, by failing to use his best efforts to consummate the deal as he promised to do.  (Links to case filings, by the way, are taken from this handy archive set up by Andrew Jennings.)

Musk filed an answer with counterclaims yesterday, but it’s under seal, so we’ll have to wait for a public version before we get a more complete account from him, but – at least based on what we know now – the dispute in this case is about who breached first. 

As has been widely reported, Musk’s arguments appear quite weak (with all due caveats about facts that may come out in the future, based solely on what has been publicly disclosed up until now, etc etc).  Stephen Bainbridge has a good break down here, but quickly:

Let’s just get the ordinary course thing out of the way – at least in his opposition to Twitter’s motion to expedite, Musk didn’t seem to be pressing on it very hard, and the fact is, the merger agreement has very seller-friendly language in which Twitter only promised to use “commercially reasonable efforts to conduct the business of the Company and its Subsidiaries in the ordinary course of business.”  Given the state of the economy and the industry, a hiring freeze and layoffs seems consistent with commercial reasonableness, and the Delaware Supreme Court has already suggested that what is “commercially reasonable” is gauged by references to peers, so it’s unlikely this has legs.

Which means the case is about the spam.  Did Twitter misstate its spam?  Or did it deny Musk information he was entitled to receive about spam?

Now, even if Twitter did misrepresent the amount of spam on the platform, that alone is not grounds to walk away; Musk would further have to show either that the misrepresentation was intentional, and that he relied on it (the common law rule about fraud in contracting), or that the misrepresentation (whether or not intentional) was so egregious that it caused a material adverse effect (which is the standard set forth in the merger agreement), and so far, there’s no evidence of any of that. 

But there’s also a good argument that Twitter did not make any false representations about spam in the first place, and Musk cannot show that it did.  There’s nothing in the merger agreement about spam; what the merger agreement says is that Twitter’s SEC filings are accurate.  Here’s what those SEC filings say:

There are a number of false or spam accounts in existence on our platform. We have performed an internal review of a sample of accounts and estimate that the average of false or spam accounts during the fourth quarter of 2021 represented fewer than 5% of our mDAU [monetizable daily active users] during the quarter. The false or spam accounts for a period represents the average of false or spam accounts in the samples during each monthly analysis period during the quarter. In making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated. We are continually seeking to improve our ability to estimate the total number of spam accounts and eliminate them from the calculation of our mDAU, and have made improvements in our spam detection capabilities that have resulted in the suspension of a large number of spam, malicious automation, and fake accounts. We intend to continue to make such improvements. After we determine an account is spam, malicious automation, or fake, we stop counting it in our mDAU, or other related metrics.  We also treat multiple accounts held by a single person or organization as multiple mDAU because we permit people and organizations to have more than one account. Additionally, some accounts used by organizations are used by many people within the organization. As such, the calculations of our mDAU may not accurately reflect the actual number of people or organizations using our platform.

Notice here that Twitter is not making a specific representation about spam or bots; it’s representing that it conducts an analysis, that analysis reached a result, and that result could be wrong.  Even if Musk got the data he wants, conducted his own analysis, and reached a different result, that still would not show that Twitter’s actual representation was false. 

(The July 8 letter also alleged that Twitter continued to include accounts identified as spam in the mDAU despite claims not to do so, but I don’t see that allegation repeated in Musk’s Chancery filings so far. We’ll see if that pops up again in the answer).

As for Musk’s rights to information, he’s only entitled to information “for any reasonable business purpose related to the consummation of the transactions,” and even that with lots of caveats (Twitter can deny information if it would be disruptive, cause competitive harm, etc).  And his demand for increasingly detailed spam information – Twitter is already providing him with reams of data – hardly seems like it falls in that category.  (As Twitter argued in its complaint at ¶96, he wants this information to find an excuse to blow up the deal, not to close it).

In Delaware Chancery, the parties first sparred over a trial date – Musk wanted February, Twitter wanted September – and Chancellor McCormick decided that a five-day trial would be held in October.

Next, the parties sparred over the exact dates in October (Musk wanted the week of October 17, Twitter preferred October 10 but was amenable to October 17 with assurances that the trial length would remain 5 days), and McCormick ordered a trial from October 17-21.

But the important thing to note – and this is the reason I’m posting – is that the significance of these skirmishes is not the trial date per se.  The significance is what the trial is about.  Musk claims he needs a prolonged schedule in order to obtain data from Twitter and employ significant computing power/expertise to analyze it and identify spam.  Twitter, by contrast, claims that no spam information is even necessary because it never made any representations about spam, and therefore this can all be resolved quickly.  As Twitter’s counsel put it in a scheduling hearing on July 19, “When the Court consults page 5 of Twitter's 10-K, it will see that it says … Twitter has a system for monitoring false or spam accounts. It is a system that requires judgment. It yields the outcome that fewer than 5 percent of users are false or spam accounts, but it may well be wrong. The number, the disclosure expressly says, could be higher.  That is what we are testing, Your Honor. And this does not require a recreation of all things known to humanity.”

And all this was also teed up in the parties’ arguments about trial dates; even though there’s very little difference between October 10 and October 17, both of them were simultaneously shoehorning in arguments over the scope of discovery.  Musk accused Twitter of refusing to produce voluminous amounts of raw data; Twitter responded that Musk’s requests were “irrelevant to Twitter’s complaint and Musk’s asserted bases for attempting to terminate. The vast amount of data related to Twitter’s user activity and platform that Musk seeks has no apparent connection to any term of the merger agreement.”

McCormick was only being asked to set a schedule, but the subtext was, that schedule must be informed by the scope of discovery.  McCormick clearly understood that, because in her order, she stated she had not “resolve[d] any specific discovery disputes, including the propriety of any requests for large data sets,” though she did limit the parties to 25 interrogatories (Twitter claims that Musk has already served 68 interrogatories, see ¶17).  And, recognizing the sensitivity of discovery issues in this case, McCormick set out a procedure for the parties to try to address any discovery disputes before bringing them to the court, involving each side designating a Delaware lawyer to review its side’s privilege logs, and designating a lawyer who will serve as the party’s “Discovery Liaison.”  Per The Chancery Daily, this procedure has been used before in a case with significant discovery disputes.

So McCormick has avoided weighing in on the scope of discovery thus far, without much of a record or briefing before her, though she has tilted towards Twitter’s view of the matter.  Sooner or later, though, McCormick will likely have to decide a discovery motion regarding exactly the kind of data Twitter is required to produce.  And while discovery disputes are usually rather ho-hum matters for those of us watching from the cheap seats, in this case, discovery could, as a practical matter, end the case.  Twitter can and will argue that it need not produce extensive datasets because Musk has not demonstrated that the amount of spam on the platform is relevant to the merger agreement (or at the very least, because Musk already has the information he needs), and if McCormick agrees, she’s functionally cut the legs out from under Musk’s entire bases for claiming Twitter breached first.  And while I wouldn’t read too much into a decision by McCormick that allows Musk some leeway on this, if she orders production of large amounts of new data, that suggests she thinks there may be some merit to Musk’s claims.  (Or, at least, that she wants publicly to be seen as fair, and not provide a basis for Supreme Court reversal, in a high profile case. Hard to say.)

So.  That’s my point.  It’s not about the dates; it’s about how much this trial really will test Twitter’s spam counts.  There’s a plausible path for Twitter to win long before trial begins, and schedules – and more importantly, discovery disputes – can be viewed through that lens.