It’s becoming quite clear that Elon Musk no longer wants to buy Twitter Inc., at least not at the price he negotiated. But Twitter should not walk away without at least $1 billion — and potentially much more — for the trouble. Musk’s bid for Twitter has become one of the strangest M&A sagas Silicon Valley has ever seen. Here’s a quick recap: Musk bought some Twitter stock, reached an agreement to serve on the board, rescinded that agreement, made a bid to buy the company and take it private, and that bid was ultimately accepted However, as stock prices have plunged in an overall market downturn, Musk has suffered from apparent buyer’s remorse and is saying that the deal is on hold. One problem with that move is that it doesn’t exist.
“There is no procedural step in the closing of a company that is called ‘deal on hold,’ there is ‘no deal on hold’ built into the agreement,” said Stephen Diamond, an associate law professor at Santa Clara University. It is sometimes hard to ascertain what is true when dealing with Tesla Inc.’s chief executive, but one really obvious thing is true in this case: The two sides have a contract, and it is legally enforceable. Musk looks to be fishing for a valid argument under which he could back out of paying $44 billion for a company that would be lucky to trade for half that valuation without the bid — and is trading nearly 30% lower even with it — but likely hoping to avoid responsibility for the $1billion break up fee that is built into the contract. Getting cold feet is no sufficient basis to withdraw … so presumably at this point if he really wanted out he would have said so, and [Twitter] would demand the breakup fee,” Diamond said, adding that most of what Musk has been engaged in of late amounts to noise “to find some leverage to renegotiate the deal.”
Musk has sought to focus that noise on the number of bot accounts on Twitter, which the Tesla and SpaceX chief has said he believes exceeds the 5% that Twitter carefully claims in its filings with the Securities and Exchange Commission. Musk claimed over the weekend, without providing evidence, that bots actually account for anywhere between 20% and 90% of Twitter users. Twitter CEO Parag Agrawal showed Musk how to use actual evidence and knowledge of the inner workings of social media in discussing bots on Twitter after Musk made his attention-grabbing allegation. Musk, in response, sent Agrawal a poop emoji. That appears to be the level of discourse he is willing, or able, to engage in on this subject. If this seems to you like something that should have been hashed out in the due-diligence portion of the deal-making process, you’re not wrong. However, Musk waived his right to perform due diligence on Twitter before signing the deal, as outlined in Twitter’s SEC filing detailing the run up to the acquisition that was filed Tuesday Morning.
“Mr. Musk also disclosed that his acquisition proposal was no longer subject to the completion of financing and business due diligence,” Twitter stated in its recap of how the deal took shape. Musk is also not learning about bots on Twitter for the first time. As Diamond noted, Musk talked about solving the bot issue as a reason he was buying Twitter in the news release announcing the deal. “Isn’t the whole point of him buying it to make it better, so he could improve it?” Diamond asked. It might be helpful to recap again here, via a metaphor. What Musk has done is akin to a normal person agreeing to waive all inspection contingencies in order to buy a house, signing a contract on the house while publicly proclaiming, “I’m going to fix up this dump,” then deciding during the closing period that the house is too rundown and demanding to be let out of the contract while personally attacking the seller.
So what should Twitter do about Musk? Let me ask you what you would do as the seller in the home-sale situation: Let the buyer walk, sell the house to the buyer at a discounted rate, or hold the buyer’s feet to the fire and get every cent guaranteed in the contract both of you signed? For Twitter’s board and its executives, the imperative is to continue forward with the deal as agreed, and they have to ignore Musk’s actions, which may be crossing legal lines, until they can close a deal. At the very least, Musk should have to pay that $1 billion if he is found in breach of the agreement as the deal fails to close. In addition, since his recent actions on Twitter could be considered disparaging toward the company — and he promised in the merger documentation not to engage in disparagement — he could eventually be subject to further legal action brought by Twitter. “They don’t want to sue this guy. They want to sell the company,” Diamond said. “At the end of the day, what value are those sorts of lawsuits? They will focus on moving ahead with the deal as agreed, and that’s it, and let Musk try to find some leeway to renegotiate the price.” The board could seek to do much more than that.
If Twitter holds up its end of the bargain and Musk does not, the board could sue him for “specific performance,” which, if successful, would force him to go through with the acquisition as specified in the contract. While that is unlikely and would almost certainly lead to a long and arduous legal battle, the threat of it could lead to a settlement of more than the $1 billion it seems obvious Musk would owe. Diamond noted, though, that the addition of the specific-performance clause, which is somewhat rare, is an indication that Twitter harboured a suspicion that Musk could behave in this manner. The Twitter board owes its shareholders every cent it can pull out of the pockets of the world’s richest man after what he has put the company, its investors and its employees through in the past month. It is board members’ fiduciary duty to do so, and Musk has given them every reason to stand strong against him. MW
