Musk threatens to walk away from Twitter deal

cigaretteman

HR King
May 29, 2001
70,709
50,239
113
Elon Musk is threatening to walk away from his $44 billion bid to buy Twitter, accusing the company of refusing to give him information about its spam bot accounts.
Lawyers for the Tesla and SpaceX CEO made the threat in a letter to Twitter dated Monday. That letter was included in a filing from Twitter with the Securities and Exchange Commission.
The letter says Musk has repeatedly asked for the information since May 9, about a month after his offer to buy the company, so he could evaluate how many of the company's 229 million accounts are fake.
Shares of Twitter Inc. tumbled more than 5% at the opening bell Monday.

A message was left early Monday seeking comment from Twitter.

The lawyers say in the letter that Twitter has offered only to provide details about the company's testing methods. But they contend that's "tantamount to refusing Mr. Musk's data requests." Musk wants data so he can do his own verification of what he says are Twitter's lax methodologies.



The lawyers say that based on Twitter's latest correspondence, Musk believes the company is resisting and thwarting his information rights under the April merger agreement.
"This is a clear material breach of Twitter's obligations under the merger agreement and Mr. Musk reserves all rights resulting therefrom, including his right not to consummate the transaction and his right to terminate the merger agreement," the letter says.



Twitter CEO Parag Agrawal has said the company has consistently estimated that fewer than 5% of Twitter accounts are fake. Twitter has disclosed its bot estimates to the U.S. Securities and Exchange Commission for years, while also cautioning that its estimate might be too low.
The bot problem also reflects a longtime fixation for Musk, one of Twitter's most active celebrity users, whose name and likeness are often mimicked by fake accounts promoting cryptocurrency scams. Musk appears to think such bots are also a problem for most other Twitter users, as well as advertisers who take out ads on the platform based on how many real people they expect to reach.

Experts have said Musk can't unilaterally place the deal on hold, although that hasn't stopped him from acting as though he can. If he walks away, he could be on the hook for a $1 billion breakup fee.

The Twitter sale agreement allows Musk to get out of the deal if there is a "material adverse effect" caused by the company. It defines that as a change that negatively affects Twitter's business or financial conditions.
In the letter, Musk attorney Mike Ringler points to a spat over a June 1 letter from Twitter in which the company said its information obligations are limited to facilitating the closing of the sale. It says Twitter is obligated to provide data for any reasonable business purpose needed to complete the deal.

Twitter also has to cooperate with Musk's effort to get the financing for the deal, including providing information that's "reasonably requested" by Musk, the letter states.

The letter contends that Musk is not required to explain his rationale for requesting data or submit to "new conditions the company has attempted to impose on his contractual right to the requested data."

It alleges that Musk is entitled to the data about the core of Twitter's business model so he can prepare the transition to his ownership.

 

mnole03

HR Legend
Mar 20, 2005
21,759
56,272
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Yeah, spam bots that’s it.
1saanv.gif
 
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Hoosierhawkeye

HR Legend
Sep 16, 2008
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There are easier ways to say “I can’t afford it”

That isn't it because funding has already been secured.

I think the problem is that Musk made an impulse decision that he's now realizing isn't in his best interest. This is likely in part due to the fact that social media is outside of his forte.

He's now looking for a exit ramp in which he can essentially blame someone else for him backing out.
 

wcbtee

HR MVP
Gold Member
Apr 21, 2002
2,310
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Isn't that something you should have determined "BEFORE" you made an offer to buy a company?
How would you determine that? They won't tell him now. That's part of due diligence, you get a chance to peak under the covers a bit and see what you are buying.
 

Hoosierhawkeye

HR Legend
Sep 16, 2008
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I believe it's all part of the contingencies for purchase.

If that's the case it would have been in the contract and their refusal to provide that information would not cost Musk a billion dollars to get out of the deal.

Unless you are suggesting that Musk didn't have his lawyers read the freaking contract before plopping 44 billion dollars on the table and saying

money-shutup.gif


Actually with Musk that kind of tracks. . .
 
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hawknks

Scout Team
Sep 20, 2010
78
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My guess is that Elon or his buddies probably bought in right before he announced he was buying and now want to dump the stock and then buy back again after he decides next week that he is going to buy it.
 
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Colonoscopy

HR MVP
Feb 20, 2022
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That isn't it because funding has already been secured.

I think the problem is that Musk made an impulse decision that he's now realizing isn't in his best interest. This is likely in part due to the fact that social media is outside of his forte.

He's now looking for a exit ramp in which he can essentially blame someone else for him backing out.
It's obviously a shitty investment. It's not obvious how you grow twitter. (or many of the other social media companies) And he's impulsive.
 
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UNCLawHawk

HR All-American
Gold Member
Jun 20, 2001
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Yes! Finally my 18 years as a corporate M&A lawyer have prepared me to post on HROT! A little basic background on how a transaction like this usually works is probably helpful. Full disclosure - the largest deal I have ever worked on is on $20B, so only about half of what this Twitter deal is, however, the steps are generally the same whether you are talking about a $4.4M deal or a $44B deal.

Generally, the first step is that the parties sign a Non-Disclosure Agreement (NDA) that allows the target to share information about itself with the prospective buyer or buyers (in many cases there is more than 1 interested party). Once a buyer has enough information to make what they think is at least a reasonable offer to the seller they will advance to step 2.

Step 2 is generally a non-binding letter of intent (LOI). Note the words non-binding - no one has agreed to do a deal yet. However, there is generally a decent idea of what the price will be (sometimes with a range), an agreement on methods and subjects of due diligence, and usually an exclusive bargaining window where the Seller can't shop the company to anyone else. Interestingly, in my experience, the bigger the deal, the shorter the exclusivity window - people want big deals to move fast because there is a lot more risk of them becoming public. It is important to note that at this point, the deal is almost always still confidential. Here is where the NDA starts to do the heavy lifting.

During step 2, the Buyer will request access to all of the material information regarding the company. This will include financials, projections, material contracts, employee information, etc. Sometimes, certain things are limited in who can see them for competitive/anti-trust reasons - this is usually where the Buyer is a strategic buyer who is likely to be a competitor of the seller (as opposed to an investment buyer). I won't go into this here, because it does not really matter for Musk buying Twitter, however, it is an interesting area if you are interested in this part of the law!

So, IMO, if you are on the buy side (where Musk is on this Twitter deal) Step 2 is where you want to do most of your work. You are not committed to anything yet. This is where he should have asked for this Bot information. It is clearly material information in determining the purchase price of a company that makes its money based on its number of unique users. Not asking about it here would, in my opinion, be malpractice. There is a caveat though. Twitter was not actively shopping the company, so there is a chance that Step 2 never really happened. Musk made his statement about buying the company and may have skipped straight to step 3. This is the M&A equivalent to buying a house sight unseen. It is done sometimes, but it is extremely risky! I would never advise a client to do it and honestly would think about not taking on the deal if they did.

Step 3 is the signing of a definitive purchase agreement (for public companies this will almost always be called a Stock Purchase Agreement or Share Purchase Agreement - abbreviated SPA). This is where we have decided to get married. This document is binding, will have a definitive price (or stock consideration depending on the structure) and will have VERY FEW outs. This is where Musk and Twitter are currently. It is very hard for one side to unilaterally terminate a deal, however, there will be a couple of ways. One of them is the MAE (Material Adverse Effect) argument that Musk is trying to argue here. An MAE is usually defined as some change that is specific to the business that happens after the signing of the SPA which materially impacts the business's prospects. The best example is in pharmaceuticals. If you are a buying a company the developed a drug you think is going to get FDA approval and you sign your deal, then that approval falls through, that is an MAE and you can likely call off the deal. However, it should also be noted that MAE definitions are HIGHLY negotiated and no two are the same, so the next paragraph is an educated guess.

With every MAE I have dealt with, time was a factor. This means that, the issue that caused the MAE could not be known to the Buyer at the time the SPA was signed. It had to be something that happened AFTER the deal was signed or if it didn't happen after, was unknown to the Buyer and could not have been discovered exercising reasonable diligence. This is where I think Musk as a problem. He has been publicly complaining about bots for a long time. This is not something that just came up. He clearly knew that bots are an issue for Twitter and signed the deal anyway. This might make his MAE argument tougher. And MAE arguments are very hard to win for a Buyer.

If he really wants to get out of the deal, which I am not sure he does yet based on the arguments he is making (although I will admit I am really torn here!), I am a bit surprised that he is not going after a fraud in the inducement argument - that he was essentially duped into paying the price he has agreed by Twitter's SEC filings claiming that less than 5% of accounts are bots. If he could somehow figure out that that statement is untrue, he may be able to argue that, MAE or not, he never would have signed the deal if he had known the truth and the SEC statements amount to fraud (this would be REALLY interesting, because clearly the SEC would be interested in this - I actually think this is one reason Twitter doesn't want to disclose the bot information - but that is also a discussion for another day). Under this argument, that little sentence that Twitter throws into its SEC filings about its numbers possibly being wrong is doing a lot of work!

TL,DR - Corporate M&A lawyer thinks Musk screwed up his due diligence and is now trying to argue MAE, which he will have a tough time winning. If you made me bet, I think he will end up paying the break up fee and not buying Twitter.
 

Hoosierhawkeye

HR Legend
Sep 16, 2008
46,278
38,009
113
40
Yes! Finally my 18 years as a corporate M&A lawyer have prepared me to post on HROT! A little basic background on how a transaction like this usually works is probably helpful. Full disclosure - the largest deal I have ever worked on is on $20B, so only about half of what this Twitter deal is, however, the steps are generally the same whether you are talking about a $4.4M deal or a $44B deal.

Generally, the first step is that the parties sign a Non-Disclosure Agreement (NDA) that allows the target to share information about itself with the prospective buyer or buyers (in many cases there is more than 1 interested party). Once a buyer has enough information to make what they think is at least a reasonable offer to the seller they will advance to step 2.

Step 2 is generally a non-binding letter of intent (LOI). Note the words non-binding - no one has agreed to do a deal yet. However, there is generally a decent idea of what the price will be (sometimes with a range), an agreement on methods and subjects of due diligence, and usually an exclusive bargaining window where the Seller can't shop the company to anyone else. Interestingly, in my experience, the bigger the deal, the shorter the exclusivity window - people want big deals to move fast because there is a lot more risk of them becoming public. It is important to note that at this point, the deal is almost always still confidential. Here is where the NDA starts to do the heavy lifting.

During step 2, the Buyer will request access to all of the material information regarding the company. This will include financials, projections, material contracts, employee information, etc. Sometimes, certain things are limited in who can see them for competitive/anti-trust reasons - this is usually where the Buyer is a strategic buyer who is likely to be a competitor of the seller (as opposed to an investment buyer). I won't go into this here, because it does not really matter for Musk buying Twitter, however, it is an interesting area if you are interested in this part of the law!

So, IMO, if you are on the buy side (where Musk is on this Twitter deal) Step 2 is where you want to do most of your work. You are not committed to anything yet. This is where he should have asked for this Bot information. It is clearly material information in determining the purchase price of a company that makes its money based on its number of unique users. Not asking about it here would, in my opinion, be malpractice. There is a caveat though. Twitter was not actively shopping the company, so there is a chance that Step 2 never really happened. Musk made his statement about buying the company and may have skipped straight to step 3. This is the M&A equivalent to buying a house sight unseen. It is done sometimes, but it is extremely risky! I would never advise a client to do it and honestly would think about not taking on the deal if they did.

Step 3 is the signing of a definitive purchase agreement (for public companies this will almost always be called a Stock Purchase Agreement or Share Purchase Agreement - abbreviated SPA). This is where we have decided to get married. This document is binding, will have a definitive price (or stock consideration depending on the structure) and will have VERY FEW outs. This is where Musk and Twitter are currently. It is very hard for one side to unilaterally terminate a deal, however, there will be a couple of ways. One of them is the MAE (Material Adverse Effect) argument that Musk is trying to argue here. An MAE is usually defined as some change that is specific to the business that happens after the signing of the SPA which materially impacts the business's prospects. The best example is in pharmaceuticals. If you are a buying a company the developed a drug you think is going to get FDA approval and you sign your deal, then that approval falls through, that is an MAE and you can likely call off the deal. However, it should also be noted that MAE definitions are HIGHLY negotiated and no two are the same, so the next paragraph is an educated guess.

With every MAE I have dealt with, time was a factor. This means that, the issue that caused the MAE could not be known to the Buyer at the time the SPA was signed. It had to be something that happened AFTER the deal was signed or if it didn't happen after, was unknown to the Buyer and could not have been discovered exercising reasonable diligence. This is where I think Musk as a problem. He has been publicly complaining about bots for a long time. This is not something that just came up. He clearly knew that bots are an issue for Twitter and signed the deal anyway. This might make his MAE argument tougher. And MAE arguments are very hard to win for a Buyer.

If he really wants to get out of the deal, which I am not sure he does yet based on the arguments he is making (although I will admit I am really torn here!), I am a bit surprised that he is not going after a fraud in the inducement argument - that he was essentially duped into paying the price he has agreed by Twitter's SEC filings claiming that less than 5% of accounts are bots. If he could somehow figure out that that statement is untrue, he may be able to argue that, MAE or not, he never would have signed the deal if he had known the truth and the SEC statements amount to fraud (this would be REALLY interesting, because clearly the SEC would be interested in this - I actually think this is one reason Twitter doesn't want to disclose the bot information - but that is also a discussion for another day). Under this argument, that little sentence that Twitter throws into its SEC filings about its numbers possibly being wrong is doing a lot of work!

TL,DR - Corporate M&A lawyer thinks Musk screwed up his due diligence and is now trying to argue MAE, which he will have a tough time winning. If you made me bet, I think he will end up paying the break up fee and not buying Twitter.

Thanks for the in depth information but it basically confirms what a lot of us think. This was an impulse decision for Musk that he is likely now regretting.

The fact that they seem to have skipped step 2 with the non-binding letter of intent seems to confirm this. He basically agreed to buy a house without the inspection.
 
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ericram

HR All-American
Nov 5, 2002
3,388
5,639
113
Tallahassee, FL
Yes! Finally my 18 years as a corporate M&A lawyer have prepared me to post on HROT! A little basic background on how a transaction like this usually works is probably helpful. Full disclosure - the largest deal I have ever worked on is on $20B, so only about half of what this Twitter deal is, however, the steps are generally the same whether you are talking about a $4.4M deal or a $44B deal.

Generally, the first step is that the parties sign a Non-Disclosure Agreement (NDA) that allows the target to share information about itself with the prospective buyer or buyers (in many cases there is more than 1 interested party). Once a buyer has enough information to make what they think is at least a reasonable offer to the seller they will advance to step 2.

Step 2 is generally a non-binding letter of intent (LOI). Note the words non-binding - no one has agreed to do a deal yet. However, there is generally a decent idea of what the price will be (sometimes with a range), an agreement on methods and subjects of due diligence, and usually an exclusive bargaining window where the Seller can't shop the company to anyone else. Interestingly, in my experience, the bigger the deal, the shorter the exclusivity window - people want big deals to move fast because there is a lot more risk of them becoming public. It is important to note that at this point, the deal is almost always still confidential. Here is where the NDA starts to do the heavy lifting.

During step 2, the Buyer will request access to all of the material information regarding the company. This will include financials, projections, material contracts, employee information, etc. Sometimes, certain things are limited in who can see them for competitive/anti-trust reasons - this is usually where the Buyer is a strategic buyer who is likely to be a competitor of the seller (as opposed to an investment buyer). I won't go into this here, because it does not really matter for Musk buying Twitter, however, it is an interesting area if you are interested in this part of the law!

So, IMO, if you are on the buy side (where Musk is on this Twitter deal) Step 2 is where you want to do most of your work. You are not committed to anything yet. This is where he should have asked for this Bot information. It is clearly material information in determining the purchase price of a company that makes its money based on its number of unique users. Not asking about it here would, in my opinion, be malpractice. There is a caveat though. Twitter was not actively shopping the company, so there is a chance that Step 2 never really happened. Musk made his statement about buying the company and may have skipped straight to step 3. This is the M&A equivalent to buying a house sight unseen. It is done sometimes, but it is extremely risky! I would never advise a client to do it and honestly would think about not taking on the deal if they did.

Step 3 is the signing of a definitive purchase agreement (for public companies this will almost always be called a Stock Purchase Agreement or Share Purchase Agreement - abbreviated SPA). This is where we have decided to get married. This document is binding, will have a definitive price (or stock consideration depending on the structure) and will have VERY FEW outs. This is where Musk and Twitter are currently. It is very hard for one side to unilaterally terminate a deal, however, there will be a couple of ways. One of them is the MAE (Material Adverse Effect) argument that Musk is trying to argue here. An MAE is usually defined as some change that is specific to the business that happens after the signing of the SPA which materially impacts the business's prospects. The best example is in pharmaceuticals. If you are a buying a company the developed a drug you think is going to get FDA approval and you sign your deal, then that approval falls through, that is an MAE and you can likely call off the deal. However, it should also be noted that MAE definitions are HIGHLY negotiated and no two are the same, so the next paragraph is an educated guess.

With every MAE I have dealt with, time was a factor. This means that, the issue that caused the MAE could not be known to the Buyer at the time the SPA was signed. It had to be something that happened AFTER the deal was signed or if it didn't happen after, was unknown to the Buyer and could not have been discovered exercising reasonable diligence. This is where I think Musk as a problem. He has been publicly complaining about bots for a long time. This is not something that just came up. He clearly knew that bots are an issue for Twitter and signed the deal anyway. This might make his MAE argument tougher. And MAE arguments are very hard to win for a Buyer.

If he really wants to get out of the deal, which I am not sure he does yet based on the arguments he is making (although I will admit I am really torn here!), I am a bit surprised that he is not going after a fraud in the inducement argument - that he was essentially duped into paying the price he has agreed by Twitter's SEC filings claiming that less than 5% of accounts are bots. If he could somehow figure out that that statement is untrue, he may be able to argue that, MAE or not, he never would have signed the deal if he had known the truth and the SEC statements amount to fraud (this would be REALLY interesting, because clearly the SEC would be interested in this - I actually think this is one reason Twitter doesn't want to disclose the bot information - but that is also a discussion for another day). Under this argument, that little sentence that Twitter throws into its SEC filings about its numbers possibly being wrong is doing a lot of work!

TL,DR - Corporate M&A lawyer thinks Musk screwed up his due diligence and is now trying to argue MAE, which he will have a tough time winning. If you made me bet, I think he will end up paying the break up fee and not buying Twitter.
Didn't he have to put down a sizeable amount of money to begin the deal? A non refundable amount of money?
 

23 so far

HR Heisman
Mar 24, 2016
9,377
16,891
113
TL,DR - Corporate M&A lawyer thinks Musk screwed up his due diligence and is now trying to argue MAE, which he will have a tough time winning. If you made me bet, I think he will end up paying the break up fee and not buying Twitter.
Appreciate your informative response. I guess the cynic in me knows that the richest man in the world has a literal army of Lawyers, so my guess is they already know everything you have detailed here.

And if Musk decides he pays a $1B breakup fee and doesn't acquire Twitter, my guess is he didn't plan to all along and doesn't care about the cost. He's exposed these people for the frauds they are, and that may have been his goal from Day One. Mission accomplished.
 
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kc78

HR MVP
Nov 25, 2002
2,299
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Pensacola, FL
Yes! Finally my 18 years as a corporate M&A lawyer have prepared me to post on HROT! A little basic background on how a transaction like this usually works is probably helpful. Full disclosure - the largest deal I have ever worked on is on $20B, so only about half of what this Twitter deal is, however, the steps are generally the same whether you are talking about a $4.4M deal or a $44B deal.

Generally, the first step is that the parties sign a Non-Disclosure Agreement (NDA) that allows the target to share information about itself with the prospective buyer or buyers (in many cases there is more than 1 interested party). Once a buyer has enough information to make what they think is at least a reasonable offer to the seller they will advance to step 2.

Step 2 is generally a non-binding letter of intent (LOI). Note the words non-binding - no one has agreed to do a deal yet. However, there is generally a decent idea of what the price will be (sometimes with a range), an agreement on methods and subjects of due diligence, and usually an exclusive bargaining window where the Seller can't shop the company to anyone else. Interestingly, in my experience, the bigger the deal, the shorter the exclusivity window - people want big deals to move fast because there is a lot more risk of them becoming public. It is important to note that at this point, the deal is almost always still confidential. Here is where the NDA starts to do the heavy lifting.

During step 2, the Buyer will request access to all of the material information regarding the company. This will include financials, projections, material contracts, employee information, etc. Sometimes, certain things are limited in who can see them for competitive/anti-trust reasons - this is usually where the Buyer is a strategic buyer who is likely to be a competitor of the seller (as opposed to an investment buyer). I won't go into this here, because it does not really matter for Musk buying Twitter, however, it is an interesting area if you are interested in this part of the law!

So, IMO, if you are on the buy side (where Musk is on this Twitter deal) Step 2 is where you want to do most of your work. You are not committed to anything yet. This is where he should have asked for this Bot information. It is clearly material information in determining the purchase price of a company that makes its money based on its number of unique users. Not asking about it here would, in my opinion, be malpractice. There is a caveat though. Twitter was not actively shopping the company, so there is a chance that Step 2 never really happened. Musk made his statement about buying the company and may have skipped straight to step 3. This is the M&A equivalent to buying a house sight unseen. It is done sometimes, but it is extremely risky! I would never advise a client to do it and honestly would think about not taking on the deal if they did.

Step 3 is the signing of a definitive purchase agreement (for public companies this will almost always be called a Stock Purchase Agreement or Share Purchase Agreement - abbreviated SPA). This is where we have decided to get married. This document is binding, will have a definitive price (or stock consideration depending on the structure) and will have VERY FEW outs. This is where Musk and Twitter are currently. It is very hard for one side to unilaterally terminate a deal, however, there will be a couple of ways. One of them is the MAE (Material Adverse Effect) argument that Musk is trying to argue here. An MAE is usually defined as some change that is specific to the business that happens after the signing of the SPA which materially impacts the business's prospects. The best example is in pharmaceuticals. If you are a buying a company the developed a drug you think is going to get FDA approval and you sign your deal, then that approval falls through, that is an MAE and you can likely call off the deal. However, it should also be noted that MAE definitions are HIGHLY negotiated and no two are the same, so the next paragraph is an educated guess.

With every MAE I have dealt with, time was a factor. This means that, the issue that caused the MAE could not be known to the Buyer at the time the SPA was signed. It had to be something that happened AFTER the deal was signed or if it didn't happen after, was unknown to the Buyer and could not have been discovered exercising reasonable diligence. This is where I think Musk as a problem. He has been publicly complaining about bots for a long time. This is not something that just came up. He clearly knew that bots are an issue for Twitter and signed the deal anyway. This might make his MAE argument tougher. And MAE arguments are very hard to win for a Buyer.

If he really wants to get out of the deal, which I am not sure he does yet based on the arguments he is making (although I will admit I am really torn here!), I am a bit surprised that he is not going after a fraud in the inducement argument - that he was essentially duped into paying the price he has agreed by Twitter's SEC filings claiming that less than 5% of accounts are bots. If he could somehow figure out that that statement is untrue, he may be able to argue that, MAE or not, he never would have signed the deal if he had known the truth and the SEC statements amount to fraud (this would be REALLY interesting, because clearly the SEC would be interested in this - I actually think this is one reason Twitter doesn't want to disclose the bot information - but that is also a discussion for another day). Under this argument, that little sentence that Twitter throws into its SEC filings about its numbers possibly being wrong is doing a lot of work!

TL,DR - Corporate M&A lawyer thinks Musk screwed up his due diligence and is now trying to argue MAE, which he will have a tough time winning. If you made me bet, I think he will end up paying the break up fee and not buying Twitter.
So basically what most of us think. Musk is impulsive like Trump and refuses to listen to actual strategists, instead relying on his "gut". This meant that he skipped past all the initial niceties and tried a brute force buy of a company that didn't want to sell because of his ego or something. Then he started realizing that maybe this was a bad deal after all (Like everybody else out there thought) and now he wants out.

Fine, I don't want him in at all. That said, I would like for him to somehow prove all of these bots and force twitter/facebook to finally take them seriously and rid the world of them. I think social media would become quite a bit saner if we got rid of all the bot accounts out there. I mean we know they exist, we've even seen the evidence of the bot farms that have been uncovered during the war in Ukraine.
 
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May 27, 2010
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Yes! Finally my 18 years as a corporate M&A lawyer have prepared me to post on HROT! A little basic background on how a transaction like this usually works is probably helpful. Full disclosure - the largest deal I have ever worked on is on $20B, so only about half of what this Twitter deal is, however, the steps are generally the same whether you are talking about a $4.4M deal or a $44B deal.

Generally, the first step is that the parties sign a Non-Disclosure Agreement (NDA) that allows the target to share information about itself with the prospective buyer or buyers (in many cases there is more than 1 interested party). Once a buyer has enough information to make what they think is at least a reasonable offer to the seller they will advance to step 2.

Step 2 is generally a non-binding letter of intent (LOI). Note the words non-binding - no one has agreed to do a deal yet. However, there is generally a decent idea of what the price will be (sometimes with a range), an agreement on methods and subjects of due diligence, and usually an exclusive bargaining window where the Seller can't shop the company to anyone else. Interestingly, in my experience, the bigger the deal, the shorter the exclusivity window - people want big deals to move fast because there is a lot more risk of them becoming public. It is important to note that at this point, the deal is almost always still confidential. Here is where the NDA starts to do the heavy lifting.

During step 2, the Buyer will request access to all of the material information regarding the company. This will include financials, projections, material contracts, employee information, etc. Sometimes, certain things are limited in who can see them for competitive/anti-trust reasons - this is usually where the Buyer is a strategic buyer who is likely to be a competitor of the seller (as opposed to an investment buyer). I won't go into this here, because it does not really matter for Musk buying Twitter, however, it is an interesting area if you are interested in this part of the law!

So, IMO, if you are on the buy side (where Musk is on this Twitter deal) Step 2 is where you want to do most of your work. You are not committed to anything yet. This is where he should have asked for this Bot information. It is clearly material information in determining the purchase price of a company that makes its money based on its number of unique users. Not asking about it here would, in my opinion, be malpractice. There is a caveat though. Twitter was not actively shopping the company, so there is a chance that Step 2 never really happened. Musk made his statement about buying the company and may have skipped straight to step 3. This is the M&A equivalent to buying a house sight unseen. It is done sometimes, but it is extremely risky! I would never advise a client to do it and honestly would think about not taking on the deal if they did.

Step 3 is the signing of a definitive purchase agreement (for public companies this will almost always be called a Stock Purchase Agreement or Share Purchase Agreement - abbreviated SPA). This is where we have decided to get married. This document is binding, will have a definitive price (or stock consideration depending on the structure) and will have VERY FEW outs. This is where Musk and Twitter are currently. It is very hard for one side to unilaterally terminate a deal, however, there will be a couple of ways. One of them is the MAE (Material Adverse Effect) argument that Musk is trying to argue here. An MAE is usually defined as some change that is specific to the business that happens after the signing of the SPA which materially impacts the business's prospects. The best example is in pharmaceuticals. If you are a buying a company the developed a drug you think is going to get FDA approval and you sign your deal, then that approval falls through, that is an MAE and you can likely call off the deal. However, it should also be noted that MAE definitions are HIGHLY negotiated and no two are the same, so the next paragraph is an educated guess.

With every MAE I have dealt with, time was a factor. This means that, the issue that caused the MAE could not be known to the Buyer at the time the SPA was signed. It had to be something that happened AFTER the deal was signed or if it didn't happen after, was unknown to the Buyer and could not have been discovered exercising reasonable diligence. This is where I think Musk as a problem. He has been publicly complaining about bots for a long time. This is not something that just came up. He clearly knew that bots are an issue for Twitter and signed the deal anyway. This might make his MAE argument tougher. And MAE arguments are very hard to win for a Buyer.

If he really wants to get out of the deal, which I am not sure he does yet based on the arguments he is making (although I will admit I am really torn here!), I am a bit surprised that he is not going after a fraud in the inducement argument - that he was essentially duped into paying the price he has agreed by Twitter's SEC filings claiming that less than 5% of accounts are bots. If he could somehow figure out that that statement is untrue, he may be able to argue that, MAE or not, he never would have signed the deal if he had known the truth and the SEC statements amount to fraud (this would be REALLY interesting, because clearly the SEC would be interested in this - I actually think this is one reason Twitter doesn't want to disclose the bot information - but that is also a discussion for another day). Under this argument, that little sentence that Twitter throws into its SEC filings about its numbers possibly being wrong is doing a lot of work!

TL,DR - Corporate M&A lawyer thinks Musk screwed up his due diligence and is now trying to argue MAE, which he will have a tough time winning. If you made me bet, I think he will end up paying the break up fee and not buying Twitter.
You stated that you would shy away from taking on a deal where the buyer essentially skips their material discovery and due diligence prior to making an offer. Is it more of a concern about your professional reputation in the industry when the deal goes FUBAR or are there any concerns of professional liability when a client glosses over that important step in the process? Or perhaps both? It seems entirely irrational that a buyer would so cavalierly proceed with an acquisition in this manner, but I guess some folks like Musk aren’t exactly rational actors.
 

Old_wrestling_fan

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Isn't that something you should have determined "BEFORE" you made an offer to buy a company?
Depends...possibly. But it is also very common to reach an agreement in principle and then proceed to some form of due diligence. I don't know the particulars of Musk's agreement to purchase Twitter...but it is not at all uncommon for "done deals" to then unravel as the details are worked out.

Perhaps Twitter represented that they had "X number" discreet users and the agreed upon price of the transaction was based on that, at least to an extent. Then, it is discovered that they really don't have nearly as many "real" members as they purported. That is the type of thing that could derail a transaction like this one pretty fast.
 

Old_wrestling_fan

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If that's the case it would have been in the contract and their refusal to provide that information would not cost Musk a billion dollars to get out of the deal.

Unless you are suggesting that Musk didn't have his lawyers read the freaking contract before plopping 44 billion dollars on the table and saying

money-shutup.gif


Actually with Musk that kind of tracks. . .
Not necessarily...every business deal is different and I don't think that any of us know the actual particulars of this one. So one can only guess.
 
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Old_wrestling_fan

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Yes! Finally my 18 years as a corporate M&A lawyer have prepared me to post on HROT! A little basic background on how a transaction like this usually works is probably helpful. Full disclosure - the largest deal I have ever worked on is on $20B, so only about half of what this Twitter deal is, however, the steps are generally the same whether you are talking about a $4.4M deal or a $44B deal.

Generally, the first step is that the parties sign a Non-Disclosure Agreement (NDA) that allows the target to share information about itself with the prospective buyer or buyers (in many cases there is more than 1 interested party). Once a buyer has enough information to make what they think is at least a reasonable offer to the seller they will advance to step 2.

Step 2 is generally a non-binding letter of intent (LOI). Note the words non-binding - no one has agreed to do a deal yet. However, there is generally a decent idea of what the price will be (sometimes with a range), an agreement on methods and subjects of due diligence, and usually an exclusive bargaining window where the Seller can't shop the company to anyone else. Interestingly, in my experience, the bigger the deal, the shorter the exclusivity window - people want big deals to move fast because there is a lot more risk of them becoming public. It is important to note that at this point, the deal is almost always still confidential. Here is where the NDA starts to do the heavy lifting.

During step 2, the Buyer will request access to all of the material information regarding the company. This will include financials, projections, material contracts, employee information, etc. Sometimes, certain things are limited in who can see them for competitive/anti-trust reasons - this is usually where the Buyer is a strategic buyer who is likely to be a competitor of the seller (as opposed to an investment buyer). I won't go into this here, because it does not really matter for Musk buying Twitter, however, it is an interesting area if you are interested in this part of the law!

So, IMO, if you are on the buy side (where Musk is on this Twitter deal) Step 2 is where you want to do most of your work. You are not committed to anything yet. This is where he should have asked for this Bot information. It is clearly material information in determining the purchase price of a company that makes its money based on its number of unique users. Not asking about it here would, in my opinion, be malpractice. There is a caveat though. Twitter was not actively shopping the company, so there is a chance that Step 2 never really happened. Musk made his statement about buying the company and may have skipped straight to step 3. This is the M&A equivalent to buying a house sight unseen. It is done sometimes, but it is extremely risky! I would never advise a client to do it and honestly would think about not taking on the deal if they did.

Step 3 is the signing of a definitive purchase agreement (for public companies this will almost always be called a Stock Purchase Agreement or Share Purchase Agreement - abbreviated SPA). This is where we have decided to get married. This document is binding, will have a definitive price (or stock consideration depending on the structure) and will have VERY FEW outs. This is where Musk and Twitter are currently. It is very hard for one side to unilaterally terminate a deal, however, there will be a couple of ways. One of them is the MAE (Material Adverse Effect) argument that Musk is trying to argue here. An MAE is usually defined as some change that is specific to the business that happens after the signing of the SPA which materially impacts the business's prospects. The best example is in pharmaceuticals. If you are a buying a company the developed a drug you think is going to get FDA approval and you sign your deal, then that approval falls through, that is an MAE and you can likely call off the deal. However, it should also be noted that MAE definitions are HIGHLY negotiated and no two are the same, so the next paragraph is an educated guess.

With every MAE I have dealt with, time was a factor. This means that, the issue that caused the MAE could not be known to the Buyer at the time the SPA was signed. It had to be something that happened AFTER the deal was signed or if it didn't happen after, was unknown to the Buyer and could not have been discovered exercising reasonable diligence. This is where I think Musk as a problem. He has been publicly complaining about bots for a long time. This is not something that just came up. He clearly knew that bots are an issue for Twitter and signed the deal anyway. This might make his MAE argument tougher. And MAE arguments are very hard to win for a Buyer.

If he really wants to get out of the deal, which I am not sure he does yet based on the arguments he is making (although I will admit I am really torn here!), I am a bit surprised that he is not going after a fraud in the inducement argument - that he was essentially duped into paying the price he has agreed by Twitter's SEC filings claiming that less than 5% of accounts are bots. If he could somehow figure out that that statement is untrue, he may be able to argue that, MAE or not, he never would have signed the deal if he had known the truth and the SEC statements amount to fraud (this would be REALLY interesting, because clearly the SEC would be interested in this - I actually think this is one reason Twitter doesn't want to disclose the bot information - but that is also a discussion for another day). Under this argument, that little sentence that Twitter throws into its SEC filings about its numbers possibly being wrong is doing a lot of work!

TL,DR - Corporate M&A lawyer thinks Musk screwed up his due diligence and is now trying to argue MAE, which he will have a tough time winning. If you made me bet, I think he will end up paying the break up fee and not buying Twitter.
Very solid explanation! BTW, what is your hourly rate, should I be next in line to buy Twitter? :) :)
 

WDSMHAWK

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Babylon Bee convincing Elon he should buy Twitter for $44 Billion is the biggest gift a conservative group has ever pulled off. "The Stop the Steal" and "Build the Wall" groups must be taking notes.