Monday, May 23, 2022
Every once in a while, there is a contract that almost nobody wants to read but almost everyone wants the tl;dr on. So it is with Elon Musk's agreement to buy Twitter. One needs to look at the actual language of the deal, however, to know whether or not Musk's recent claim that the acquisition is "on hold" has any legs.
Well, it doesn't, and this is why Matt Levine is a national treasure. He explains what's going on in this column (for which you need a subscription to Bloomberg, but you can just subscribe to Matt Levine's column, which is what you really want anyway, and that is free).
Apparently, if you are really rich, you feel no need to tolerate minor annoyances, like seemingly robotic responses to your Tweets. Thus, in an early Tweet regarding his attempted acquisition of Twitter, Musk (right) pledged, "If our twitter bid succeeds, we will defeat the spam bots or die trying!” His bid succeeded; Musk committed to paying $44 billion to buy Twitter on April 25th. Then, last week, as NPR reported here, he announced that the transaction was "on hold" because he does not believe Twitter's estimate that fewer than 5% of its accounts are bots or spam.
But of course, as the quotation above makes clear, Musk was well aware of the bot problem on Twitter before he agreed to buy Twitter. Moreover, he has given no reason for rejecting Twitter's assurances that, as best it can tell, its estimate of the percentage of accounts that are bots or spam is accurate. The best Musk could offer in response was a poop emoji, which is a wonderful little thing, but not exactly an argument.
As this interview with Columbia University Law School's Eric Talley (left) makes clear, Musk is now making unavailing attempts to translate his poop emoji into a legal argument by characterizing the bot problem as having a "material adverse effect" on the transaction. It's nice to see him using his words, but again, since the bot problem was something that he already knew about, was in fact a reason that he cited in his announcement of his desire to purchase Twitter, it can't be used to justify his attempts to back out of the deal. To make matters worse for Musk, as Eric Talley also points out, Twitter never said anything like "we guarantee that no more than 5% of our accounts are bots." They said something much more guarded and lawyered, and what they have said hasn't changed in the weeks since Musk agreed to purchase Twitter, bots and all, for $44 billion.
As Matt Levine points out, Musk isn't interested in hearing arguments or making arguments. He is interested in playing the victim so that he can negotiate a better price for the company, as his $44 billion bid, which seemed low when me made it, now obviously seems too high, especially as the value of the Tesla stock is also currently in free fall. Musk is pledging that stock as collateral for the financing he is counting on to provide the funds for the acquisition. If he has to put up more stock as collateral, the deal becomes more expensive for him.
Twitter has no great options available. If Musk walks away in bad faith, that would trigger a $1 billion penalty clause, which Musk obviously doesn't want to pay, but the harm to Twitter of the deal cratering would be well in excess of $1 billion. There is some chance that Delaware's Chancery Court could order specific performance of the deal, and Matt Levine presents the pros and cons of that option with his usual mordant humor. In short, letting Musk walk away is bad for Twitter and for the rule of law. Forcing Musk to control Twitter could also be bad for Twitter and all of us, and Musk could defy the order, which would be really bad for the rule of law and especially for the Chancery Court.
Eric Talley wisely predicts more drama ahead. Musk may come up with some alternative material adverse effect argument or some other reason to back out of the deal. It may be that the entities that are financing the deal might back out, perhaps because Musk encourages them to back out. According to Yahoo, Musk's net worth has declined by nearly $49 billion since he announced his intention to acquire Twitter. That probably makes him grumpy. A contracts prof happy with his low six-figure salary might be advise, "Why not pay the $1 billion penalty and make it an even $50 billion?" But I suspect that you don't get to a net worth north of $200 billion by succumbing to such public defeats.