Twitter v. Musk: The Battle Begins
Billionaire Elon Musk has terminated his agreement to buy Twitter. He claims that Twitter misled him about the number of fake or spam accounts on the platform and failed to give him the information he needed to independently verify its estimates. Twitter responds that this is all pretext, and that the real reason why Musk wants out is that the market has tanked and his net worth has plummeted.
Recall that when Musk offered to buy Twitter for $54.20 per share, or about $44 billion, it was trading at $45.08 per share. When the parties announced their deal, Twitter was trading at $51.70 per share.
Fast-forward to now. Twitter is trading at around $39.49 per share. And since the market headed south, Musk’s net worth has dropped by more than $100 billion.
Sit back and get ready for the legal fight of the decade. We’ll play ring announcer.
The Arena
The fight is taking place in Delaware; the Delaware Court of Chancery, to be precise. When people think of finances, they often think of New York. When lawyers think of business disputes, they typically think of Delaware.
It’s an understatement to say that the Delaware Court of Chancery is known for its handling of business disputes. Its judges are some of the best in the country and know business issues inside and out. This is why most big corporations are incorporated in Delaware. And it’s largely why Twitter and Musk hand-picked the Delaware Court of Chancery as the venue for their fight.
In This Corner . . .
The lawyers on each side are heavyweight champions. Twitter is represented by Wachtell, Lipton, Rosen & Katz, a New York-based firm that focuses on, among other things, corporate governance and mergers and acquisitions (M&A). M&A litigation is what they do. William Savitt heads Twitter’s team.
And in This Corner . . .
Musk’s legal team consists of two powerhouses: Skadden, Arps, Slate, Meagher & Flom LLP and Quinn Emanuel Urquhart & Sullivan LLP. Both are known for, among other things, M&A litigation and, like Wachtell, Lipton, have vast experience in Delaware courts. While (to mix metaphors) their bench is long and deep, the starting team includes Edward Micheletti and Andrew Rossman.
And Tonight’s Referee Is . . . .
Chancellor Kathaleen St. J. McCormick, the head judge of the Delaware Chancery Court, has the case. Before joining the court in 2018 as a Vice Chancellor, she was a partner in a Delaware law firm where she focused on litigating internal governance and corporate disputes. She knows what she’s doing and will ensure a fair fight.
Let’s Get Ready to Rumble!
On July 12, 2022, Twitter rang the opening bell by filing its artfully drafted complaint. Although the document and supporting papers are lengthy, Twitter’s claims are actually pretty straightforward.
Twitter’s Claims
Twitter contends that Musk breached their merger agreement, a contract, in a number of ways:
- Musk keeps saying disparaging things about Twitter, which is hurting its business
- Musk has made numerous unreasonable and burdensome requests for confidential data and information that he has no right to ask for
- Musk’s professed concerns about spam or fake accounts are really just an excuse to get out of the deal
Twitter doesn’t ask for any money. Instead, it asks the court to order Musk to move forward with the deal and, in the meantime, knock off his shenanigans.
Musk’s Defenses
Musk hasn’t responded to the complaint yet, but he set out why he was terminating the deal in his termination letter, which Twitter attached as an exhibit to its complaint. Musk claims that Twitter hasn’t given him what he needs “to make an independent assessment of the prevalence of fake or spam accounts on Twitter’s platform.” He says this “is needed to ensure Twitter’s satisfaction of the conditions to closing, to facilitate Mr. Musk’s financing and financial planning for the transaction, and to engage in transition planning for the business.”
We expect Musk will argue that he doesn’t have to go forward with the deal for two main reasons:
- Twitter misrepresented its number of monetized daily active users (mDAUs) in its public filings, which Musk relied on when he agreed to the deal (as an ad-based business, the more mDAUs Twitter has, the more it’s worth)
- Twitter failed to provide information Musk wanted to verify its estimate that fewer than 5% of accounts on the platform are spam or fake.
Issues in the Case
Does Musk have the right to independently assess the number of spam or fake accounts on Twitter? That’s what the judge will decide.
Whether he’s right or wrong, Musk hasn’t said why he doubts Twitter’s figure. Although his lawyers implied in a Delaware court filing that it was because Twitter restated its estimate of mDAUs just after making the deal with Musk, the restated figure differs from the original by only .9%, and companies routinely restate their numbers for many legitimate reasons.
Further, if Musk questioned Twitter’s estimates, why did he waive due diligence? As we previously wrote, due diligence is typically an extensive (and expensive) process in which a seller provides data and information to the buyer so that it can verify that it is getting what it’s paying for. Twitter says this should have happened before the deal was reached. Musk wants to do it after.
Round One Goes to Twitter
Twitter asked for a trial in September. That’s less than two months away. Lawyers call this “fast-tracking” a case. Twitter claimed that a fast track was essential, given the impact that uncertainty about the deal is having on the markets, Twitter’s employees, and its business operations. Musk responded that the court couldn’t possibly fast-track a case as complicated and as data-intensive as this one. He asked for trial to take place in February. Chancellor McCormick sided with Twitter (essentially). She scheduled the trial for October — just three months out.
Now, reading tea leaves is often easier than trying to get into someone’s head. But if she set the case for trial in only three months, Chancellor McCormick must think that this case is more straightforward than Musk’s lawyers would have her believe. That probably bodes ill for Musk.
Who Will Win?
Each side is hoping for a knockout in court, but a settlement is more likely. Our guess (and that’s all it is — a guess) is that the deal will ultimately go forward in some form, but that Musk won’t end up paying as much.
Having said that, only one thing is certain: the lawyers have a lot of work to do between now and October.
Stay tuned!
