Elon Musk doesn’t want Twitter anymore. Maybe he never did. We’ll never know.
Frankly, I’d be tired of caring were it not for the existential implications of Musk treating a major tech company like it’s little more than a meme-inspired cryptocurrency. And of one man acquiring so much data at a moment in human history when data is synonymous not just with power in a kind of general sense of the word, but with the power to “interven[e] into the integrity of individual behavior and also the integrity of collective behavior,” as Shoshana Zuboff, author of The Age of Surveillance Capitalism, put it in April, when Musk’s bid for Twitter was a mainstay of the financial news cycle. “It’s not only about Elon Musk, but he kind of puts it on steroids,” she said.
On Friday, after a tumultuous courtship which devolved into a highly contentious, at times petulant, quarrel over the prevalence of “spam bots,” Musk unilaterally moved to terminate his merger agreement with Twitter, citing the fake account dispute.
“Mr. Musk is terminating the Merger Agreement because Twitter is in material breach of multiple provisions of that Agreement, appears to have made false and misleading representations upon which Mr. Musk relied when entering into the Merger Agreement, and is likely to suffer a Company Material Adverse Effect,” Musk’s attorney said, in a letter to Vijaya Gadde, Twitter’s Chief Legal Officer.
This is well-worn territory. If Musk intended to back out of the merger, his success would depend in no small part on the contention that, were it knowable, the “true” number of fake accounts on Twitter would constitute a Material Adverse Effect, a prospect some legal experts have described as remote.
Starting in mid-May, Musk embarked on what he claimed was an earnest (and extremely serious) quest to independently assess and verify Twitter’s internal fake account estimates. On May 13, he placed the deal “on hold,” eliciting more than a few jeers from critics, who loudly insisted “on hold” isn’t a thing. Subsequently, he made various demands of Twitter while tormenting the company on its own platform, where Musk repeatedly alluded to a conspiracy.
At every turn, Twitter reiterated its intention to close the deal on the original terms. The company supplied Musk with information, but he continued to insist it was insufficient and incomplete, a contention his attorney reiterated on Friday. “Mr. Musk has provided numerous… follow-up requests, all aimed at filling the gaps in the incomplete information,” the letter said, citing, among other correspondence, a June 20 letter in which reference was made to the insufficiency of the furnished data with regard to Musk’s preferred methodology for “spam analysis.”
Musk demanded a long list of data related to Twitter’s mDAU audits, details about “the methodologies employed” to identify and suspend accounts, two years of daily mDAU measures, board materials and communications, as well as financial modeling for this year, a budget and materials from Goldman. His lawyers also claimed that the data Twitter did furnish came “with strings attached, use limitations or other artificial formatting features” that impeded Musk’s ability to conduct a proper spam analysis.
Notably, Musk claimed that although the information furnished by Twitter wasn’t sufficient for the purposes of closing the deal, it was nevertheless enough for a “preliminary” analysis which, according to his attorney, “suggest[s] that several of Twitter’s public disclosures regarding its mDAUs are either false or materially misleading.” That partial analysis, Musk claimed, indicates the company may be “dramatically understating the proportion of spam and false accounts” and “wildly” understating their prevalence. Further, Musk claimed Twitter continues to include suspended accounts in its quarterly mDAU figures.
I’d note three things. First, someone, somewhere, and quite possibly someone at Twitter, may find it awfully convenient that Musk found the data furnished by the company sufficiently thorough to contend that Twitter could be making false or materially misleading public disclosures, but insufficient to allow for the due diligence needed to close the deal. Second, the letter from Musk’s attorney said “Twitter includes accounts that have been suspended — and thus are known to be fake or spam — in its quarterly mDAU count,” but everyone knows that not all suspended Twitter accounts are “fake or spam.” Donald Trump’s account wasn’t “spam” even if it was annoying, and it most assuredly wasn’t “fake.” Third, even suggesting that a company has made false or misleading statements in SEC filings is a serious matter. Twitter won’t appreciate it.
The letter went on to contend that Twitter’s representation, in the merger agreement, of the accuracy of its spam disclosures in its SEC filings “may have also caused, or is reasonably likely to result in, a Company Material Adverse Effect.” Again: That contention is the subject of vociferous debate, and much will hinge on it going forward.
Musk is also attempting to determine if Twitter’s “recent financial performance,” guidance and “declining business prospects” might likewise constitute a Company Material Adverse Effect. If the answer is “yes,” Musk’s lawyer said it would hand Musk “a separate and distinct basis for terminating the Merger Agreement.” Suffice to say that too will be subjected to scrutiny by other lawyers and legal experts.
Twitter’s shares took another leg lower in late trading Friday evening. They were some 32% below the deal price headed into the weekend.
At least for now, Twitter is prepared to go to battle with Musk to enforce the agreement. “The Twitter Board is committed to closing the transaction on the price and terms agreed upon… and plans to pursue legal action,” Chairman Bret Taylor said, in a tweet. “We are confident we will prevail in the Delaware Court of Chancery.”
Maybe. Probably, even. But the strength of Twitter’s case was never really in question. Rather, the question was (and is) whether the company would brave a protracted legal fight with the world’s richest person, who’s famously petty and, at times, seems genuinely oblivious to the fact that the rules of the game (all games) apply to him too. But that’s just it. That’s the crux of the issue. The rules don’t apply to him. Or at least they haven’t appeared to on innumerable occasions over the past several years.
As I wrote on May 13, Musk has proven time and again that there is a wealth threshold beyond which laws don’t really apply. This is hugely frustrating, but also very intriguing because it’s an entirely different sort of disregard than that demonstrated by the “merely” wealthy. Musk isn’t necessarily averse to the idea that laws should apply to him, nor is he inhospitable to the rule of law as a concept. Musk isn’t hostile to laws, he’s aloof to them. Arrogantly aloof, maybe. But also genuinely ambivalent.
Weighing in on Twitter’s prospects in what, at the time, was merely a hypothetical court fight, former M&A attorney and Goldman IB veteran, Matt Levine, wrote that “Musk’s bad faith will probably annoy a judge and make her more likely to specifically enforce the merger agreement.” However, he went on to say, Musk’s bad faith “might worry a Delaware judge and make her less likely to specifically enforce the merger agreement.”
It’s bad, Levine remarked, “for the rule of law generally and for confidence in Delaware corporate law in particular, if Musk blatantly ignores a merger agreement and a judge lets him get away with it.” It’d be worse, though, “if a court orders him to close and he ignores the order.”
The bottom line is as simple as it is disconcerting. If Musk doesn’t want Twitter, he won’t buy Twitter. The same way that, when he did want Twitter, he bought it. To the rest of humanity, this is a $44 billion drama. To Musk, it’s just a game.
There’s certainly an echo of American Exceptionalism and Hubris for the Biggest Egos on display these past years. It’s a test of our Democratic Experiment: could Musk (or Trump) commit murder in broad daylight and would the law apply to them too?
I thought I heard there was a $1B termination fee: it certainly sounds like lawyers will go back forth for at least that amount (and the Banks and advisers will get their piece too).
Silver Lining: Musk’s unforced error is out there for all to see and hopefully “rogue billionaires” (Bezos, Ellison, Zuckerberg, Page, Brin, Dorsey, etc.) will be more circumspect.
If the court finds that “recent financial performance,” guidance and “declining business prospects” might likewise constitute a Company Material Adverse Effect, they’ll be setting a dangerous precedent. That’s basically handing any prospective buyer a free put option. I’d be very surprised if the court sides w/ Musk on this argument. With respect to the amount of bots on the platform, while I didn’t read the contract, I think there’s two issues working against Musk. First, he ignored his obligation to use due diligence in analyzing Twitter’s business. Whether it was hubris, petulance, or his genuine appraisal of the company’s value, he made a firm offer. Unless there’s a clause that states the deal is contingent upon Twitter proving that less than 5% of traffic is bots/spam, then I don’t see how Musk prevails here. Second, courts often make decisions based at least in part on ‘what a reasonable person would do in similar circumstances’. I think reasonable people who use Twitter would agree that bots/spam are irritating, and that there are too many of them, but that they don’t render Twitter unusable. If the bots indeed were making the platform unusable, then billions of us wouldn’t be using it every day. And just like Elon, many of us are on there every day.
I think Musk ends up paying the breakup fee, but isn’t forced to buy Twitter.
Gyal- lee, no matter what this is a major deficiency in his CV.
This is a remarkable (and, I think, entirely accurate) assessment from Levine’s latest (out Saturday):
“The fact that Musk is working in such bad faith here — that he seems so unconcerned with law and the contract he signed — cuts both ways. On the one hand, it will certainly annoy a Delaware chancellor; Delaware likes to think of itself as a stable place for corporate deals, with predictable law and binding contracts, and Musk’s antics undermine that. On the other hand it might intimidate a Delaware chancellor: What if the court orders Musk to close the deal and he says no? They’re not gonna put him in Chancery jail. The guy is pretty contemptuous of legal authority; he thinks he is above the law and he might be right. A showdown between Musk and a judge might undermine Delaware corporate law more than letting him weasel out of the deal would.”
This is a wildly perilous path to go down when the stage is set for the exponential wealth creation machine to spin ever faster going forward.
I have no idea who the appropriate authority might be, but in this situation, someone from the United States government might want to consider going to Musk and explaining that yes, in fact, he is subject to the same laws as everyone else, and that once he has his day(s) (and probably months and years) in court, if he’s ultimately unsuccessful, he will have to abide by whatever the final decision by the courts is, just like everybody else in the country, and that failure to do so will result in the same consequences that would be incurred by anyone else under the same circumstances, with the obvious (and unfortunate) caveat that rich people always get off lighter.
The point is this: If Musk is “above the law” in the same way hugely wealthy people are usually above the law, that’s one thing. It’s not a good thing, but, to use a phrase I despise, it is what it is. But, he cannot (absolutely cannot) decide that he’s above the law in a literal sense, where that means he’s free to do whatever he wants to do, whenever he wants to do it, with no consequences whatsoever as long as whatever it is he wants to do doesn’t constitute a violent crime. That’s where this Twitter thing seems to be headed. I don’t think it’s his intention (at all). But whatever his intentions, we seem to be headed in the direction of Musk being effectively above all laws as long as he isn’t personally and directly inflicting physical harm on anyone. That can’t be allowed to happen. If we go down that road, and he takes SpaceX public and becomes a trillionaire with control over a private space exploration company, there’s no telling what’s next.
Sounds a lot like what Trump enjoyed during his presidency (and is yet to be held accountable for all his transgressions more than 18 months after relinquishing office).
If he’s not breaking the law, we need new legislation