The Musk-Twitter Merger
I hope that you all have been reading about the pending litigation between Twitter and Elon Musk, following Musk’s recent attempt unilaterally to terminate his merger agreement with Twitter. This is big news in the M&A world and it is a story which all you budding young investment bankers and corporate lawyers should be following closely. But if you have not yet gone to law school, let alone spent decades as a M&A lawyer, you may have some trouble making sense out of what you have read in the press, much of which seems to me confused, incomplete or just plain wrong.
In an attempt to better understand the Twitter-Musk litigation, and the possible outcomes, I have prepared the following summary of what I have been able to piece together from various public and private sources, including press reports, relevant SEC documents and discussions with corporate lawyers. This is my synthesis of what I think I have learned, and many people may disagree with me, including some more qualified to opine on these matters. If any readers think I have gotten something materially wrong here, by all means feel free to say so publicly or privately. I would love to hear from you.
Why is Musk attempting to terminate the Twitter merger agreement? This is an interesting and important question, but in answering it we should be careful to distinguish between what Musk now says about his reasons for termination and what his real motivations may be. What Musk now says (through his lawyers, eg in this merger termination notice) is that Twitter breached the terms of the merger agreement, thereby providing Musk with the right to terminate the merger unilaterally and without financial consequence to him.
Musk claims that Twitter breached the merger agreement in three ways: (1) by failing to provide him on a timely basis with certain information about Twitter’s business which he reasonably requested pursuant to the terms of the merger agreement, specifically information about Twitter’s methodology for calculating the number of estimated spam accounts; (2) by making false representations in the merger agreement as to the accuracy of certain Twitter SEC disclosures, specifically those disclosures relating to the number of spam accounts; and (3) by making certain business decisions after the signing of the merger agreement which were not in the ‘ordinary course of business’ (as required by the merger agreement) and which were taken without Musk’s approval (which may or may not have been required), specifically several HR (personnel) decisions.
As I have suggested in previous posts, however, it is quite likely that Musk’s stated reasons for termination are largely or entirely pretextual, which is the position taken by Twitter in the pending litigation. (You can read Twitter’s legal complaint here and I encourage you to do so.) Elon Musk has for some time now demonstrated pretty consistently in his actions, and communicated publicly through his voluminous tweets, that he wants desperately to back out of his impulsive and ill-advised merger agreement with Twitter. And he has been hard at work attempting to lay the legal groundwork for doing so, in ways that he hopes will be found credible by the courts but which on their face do not seem terribly convincing. As we should all know by now, just because something is repetitiously stated as fact and communicated on social media to hundreds of millions of receptive (even gullible) followers, does not make it true. Particularly not when it comes from someone like Elon Musk.
So what are Musk’s real reasons for backing out of the merger? Who knows why Elon Musk does some of the things he does? But in this case I think the reasons seem pretty clear. Since April 25th, when Twitter accepted Musk’s unsolicited offer to buy the Company, conditions in the capital markets and the real economy have deteriorated significantly, making Musk’s firm commitment to buy Twitter look increasingly uneconomic and ill-considered. And perhaps more importantly, the fall in the stock market—and specifically in the price of Tesla shares—has caused Musk’s personal net worth to drop by an estimated $100 billion. (Yes you read that right: $100 billion.) Musk may still be one of the world’s richest human beings, but he is not nearly as rich as he thought he was when he made the commitment to buy Twitter. And a loss of $100 billion is real money, even in Musk world, equivalent to roughly four times the pre-Musk market value of Twitter. Perhaps if Musk’s net worth had gone up by $100 billion, instead of down, he would still be willing to buy Twitter.
It is also the case that the market price of Twitter shares has fallen significantly since the merger agreement was announced, which may have spooked Musk and his co-investors or provided them with some perverse incentives. After briefly pushing through $50 a share shortly after the merger announcement, the Twitter share price has subsequently traded down into the low to mid-$30s, a huge discount to the merger price of $54.20. This fall in the Twitter share price will at a minimum have signaled to Musk and his co-investors that perhaps they should consider attempting to renegotiate downward the agreed merger price, which is a lot easier to do tactically if Musk has the legal right to terminate than if he does not, But Twitter’s falling share price may also have convinced Musk & Co that they no longer want to buy Twitter at any price, even a reduced one.
And to make matters worse for Musk, it seems that has not been able to raise nearly as much third-party financing for this deal as he likely hoped and expected to at the time he signed the merger agreement. You will recall that while Musk’s initial offer to buy Twitter was expressly conditional on financing, this condition was negotiated out of the merger agreement and is no longer part of the deal. This is an important point worth repeating: Musk’s contractual commitment to buy Twitter for cash is not subject to a financing contingency.
Closing the Twitter merger will require that Musk come up with something like $46.5 billion in cash (per Musk’s estimates). Of this amount, $13.5 billion has been committed by a Morgan Stanley led consortium in the form of non-recourse debt financing to be provided directly to the post-merger Twitter. This leaves Musk with a $33 billion funding hole which needs to be filled with equity investments, to come from Musk and/or others. To date, Musk has raised only about $7 billion in third party equity commitments, leaving him personally on the hook for another $26 billion or so (assuming the third-party equity commitments are still good.) To fund his share, Musk sold about $8 billion of Tesla shares in late April but he pledged publicly at the time not to sell any more Tesla shares (the price of which has since fallen significantly). And although Musk initially arranged a $12.5 billion margin loan facility (secured by his Tesla shares), he let this commitment lapse during the month of March.. All of which leaves Musk about $18 billion short by my rough calculations, and I see no evidence that he has been trying very hard to come up with the money over the past few months.
Elon Musk may be one of the richest people on the planet, but he is not nearly as rich as he was at the time he signed the merger agreement. The vast majority of Musk’s personal net worth is tied up in the shares of Tesla and several other companies, the market value of which has been declining and which are not particularly liquid in any event. However rich (or liquid) Musk may (or may not) be, he has made eminently clear by his actions (and inactions, on the funding side) that he is no longer serious about buying Twitter. Hence the termination notice and his attempts to walk away from the deal entirely.
What happens if the court finds that Twitter did breach the merger agreement? It is possible that the Delaware court will find that Twitter did in fact breach one or more of its obligations under the merger agreement, that these breaches were material to Musk’s obligations to close, and that Musk himself did not also violate the agreement. If this happens, it would seem to be game over for Twitter. Twitter will remain a stand-alone (and badly damaged) public company, with a stock price perhaps under $30, and Musk will walk away personally unscathed and un-humbled. I do not think this outcome is likely, but I may well be wrong.
And if Musk loses? This is where things get really interesting. If the Delaware court finds that Twitter did not breach its obligations under the merger agreement, Musk seems to be obligated legally to fund and close the merger with Twitter. He can’t simply walk away because he changed his mind, with or without the payment to Twitter of money damages or a break fee. And the courts in Delaware have the authority and I suspect the inclination to hold Musk to this obligation.
This may seem an odd outcome to those of you who know even a little bit of contract law, perhaps what you learned in your undergrad business law course. In most contractual disputes, say a real estate purchase and sale transaction, the spurned seller is legally empowered to collect from the breaching buyer only money damages, essentially the difference between the agreed contractual price and the court-determimed value of the property at issue. Courts will not generally force the buyer to close on the deal, although they may force the seller to do so if the property at issue is somehow unique (as with much real estate). And this is often true in merger transactions as well, particularly with a financial buyer in an all-cash deal. But there are reasons to think that the Twitter case may and should be treated differently.
The Twitter merger agreement includes carefully drafted and negotiated provisions making clear that in the event of a material breach by Musk, the Company is entitled to specific performance of the merger agreement and to a court order mandating that Musk and his controlled entities fund and close the deal on the originally agreed terms. The Delaware court has legal authority to order such a remedy, which it has done in other cases, and Elon Musk has personally committed in the merger agreement to comply with such an order and to cause his corporate acquisition vehicles also to comply. And specific performance, not money damages, is exactly what Twitter is now seeking in court.
[I encourage student readers to skim Twitter’s Complaint and the relevant sections of the Merger Agreement, particularly those of you who think you might be interested in a career in corporate law. Be cautioned however: Reading these documents may induce headaches and could change your mind about law school. If so, it is better that this happen now rather than later. It will save you a lot of time, money and heartache.]
Why would Twitter want Musk to close, given what a pain he has been to deal with? Good question. I think the flippant answer is something Colin Powell apparently said to then President Bush about the US invasion of Iraq: “If you break it, you own it”. Twitter alleges that Elon Musk has over the past few months done substantial damage to Twitter through his various breaches of confidentiality, non-disparagement and other provisions of the merger agreement, and I suspect that many people on Twitter’s board simply want to be done with the whole thing and leave Elon to clean up the mess he created. Their view might well be “Elon broke it, so Elon can buy it. And good luck to him.”
A more thoughtful answer, however, seems to be that forcing Musk to fund and close the acquisition is the only way that Twitter and its shareholders can legally get their hands on the the full acquisition consideration promised by Musk, which likely exceeds the current value of Twitter by $20 billion or so (based on the recent market trading value of TWTR shares). The merger agreement makes clear that the remedy for Musk’s wrongful failure to close is specific performance, not money damages, which are in any event capped by the merger agreement at $1 billion.
Can’t Musk just walk away and pay the agreed $1 billion break fee? No, Musk cannot just walk away from the deal at a cost of $1 billion, despite what you might have read in the press. My understanding is that the widely publicized “break fee” of $1 billion is payable by Musk to Twitter only in the event that Twitter elects not to close following a specified buyer breach. Which of course is not at all what Twitter is now seeking to do.
But will a Delaware court actually grant Twitter specific performance? The merger agreement signed by the parties to this deal—including Musk personally, as to this (and other) specific issue(s)—clearly specifies specific performance as the agreed remedy in the event of a buyer breach of the sort alleged here. The Delaware Chancery Court has the clear legal authority to mandate specific performance in suitable circumstances and it has done so on prior occasions, including in the famous Tyson Foods IBP case. (The judge in that case, since retired from the Delaware bench, and is now on Twitter’s litigation team.) And it is not clear to me why the Delaware court would not do so again in the Twitter case, if the established facts warrant such relief, as appears (to me) to be the case.
But not everyone agrees with this view. Some commentators seen to think that while specific performance might make sense in smaller deals—the Tyson deal was for $3 billion, not $46 billion— it is simply not practical (or advisable) to order specific performance in a deal the size of the Twitter merger, for reasons I do not understand. The fact that the Twitter deal is big one makes it even more important, imperative even, that the Delaware courts hold the parties to their contractual obligations, which in this case would seem to mandate specific performance.
Some would argue that specific performance should not be granted when money damages would suffice, as might appear to be the case here given that this is an all-cash deal with a financial buyer (in contrast say to an all-stock merger with a synergistic merger partner). And while there is some precedent for this view, the Delaware courts seem more sympathetic to the remedy of specific performance when that is the parties negotiated remedy of choice.
Delaware is the legal home to something like two-thirds of all Fortune 500 (public and private) companies and to 80% of all US companies which go public via IPOs. No other US state has anywhere near this sort of corporate domicile franchise. Delaware is the legal jurisdiction of choice for most US corporations in large part because of its clearly settled (and flexible) corporate law, its sophisticated judiciary and its established reputation for enforcing the agreed terms of corporate merger (and other) transactions. If in the Twitter case the Delaware court is widely perceived not to have enforced a clearly applicable remedy of specific performance simply because it would cost one of the parties too much money, the damage to Delaware’s corporate franchise (and to the M&A market more broadly) could be substantial.
What happens if the Delaware court orders specific performance but Musk simply refuses to comply? This is the nightmare scenario, and I do not know how this might play out. The Delaware court has legal jurisdiction over all of the parties to this dispute, but it is not clear to me exactly what enforcement tools the court has at its disposal which can be used to sanction Musk’s potential non-compliance with court orders and force him to pony up tens of billions of dollars personally to close a deal he no longer wants to do. But there must be an answer, and if one you knows what it is please drop me a note.
I will also be interested to see what if any further involvement the SEC might have in this matter. Musk is already in hot water with the SEC over his past Tesla going private tweet (since settled) and more recently with various legal missteps Musk has allegedly made in conjunction with the Twitter deal. (Read here.). If the SEC ramps up its enforcement action against Musk, I suppose it could change the closing dynamics significantly. But again, I really don’t know.
When is the trial and how long will it take? I’m not sure, but stay tuned for more information on this front. Twitter has filed for an expedited trial date, which Musk is resisting. The hearing on this issue is scheduled for Tuesday July 19th, but we don’t yet have a trial date. And while Twitter’s lawyers have said that it will only take them a few days to present their evidence in court, I have no idea how long a trial like this might last or how quickly the decision might be issued and the inevitable appeals exhausted.
But whenever the trial begins, and however long it takes, this will be a “must follow” event for those of you interested in M&A or corporate law. In the world of corporate M&A, the Twitter-Musk trial promises to be just as riveting as the Johnny Depp-Amber Heard trial was in pop culture. And Elon Musk will have the unique distinction of having been personally involved in both of these ‘affairs’. Where does he find the time and energy?
As you might suspect, I didn’t follow the Depp-Heard trial but I will be following the Twitter-Musk trial very closely. And I can’t wait to hear Elon Musk explain on the witness stand, under oath, what the heck he thought he was doing at various stages of this deal and why his voluminous tweets are not as damaging to his legal case as they seem to be. I am particularly interested in his explanation of the recent poop emoji and “Chuckmate” tweets. And as the trial date draws near, we can all look forward to even more Musk tweets, sent out to his 100 million followers (bots included), which may perhaps include something along the following lines:
“Big trial in Wilmington. Be there. Will be wild”.
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