Musk threatens to walk away from Twitter deal

Feb 25, 2008
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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.
I mean, pssshhhh, duh......everyone knows that.
 

Hawk and Awe

HR Heisman
Sep 15, 2012
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I don’t generally thing tech should be heavily regulated - or put another way - asking a group of baby boomers politicians to do it is probably going to have unintended consequences (and not actually accomplish much of anything).

But it’s pretty baffling to me how we tolerate even 1% of bots on these sites and aren’t horrified that they don’t know the real number (or claim not to know).

Banks have to know who their customers are and they make it work. It’s BS.
 

LuteHawk

HR Legend
Nov 30, 2011
28,230
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The 51 yr. old Elon Musk has been busy populating the earth.
One of the world's richest men, he has 10 children with 3 women,
6 with first wife, Justine, 2 with second wife, Claire and 2 with
current companion Zilis. This cultural icon is a creative man.
 
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ericram

HR All-American
Nov 5, 2002
3,494
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Tallahassee, FL
The 51 yr. old Elon Musk has been busy populating the earth.
One of the world's richest men, he has 10 children with 3 women,
6 with first wife, Justine, 2 with second wife, Claire and 2 with
current companion Zilis. This cultural icon is a creative man.
I wonder how much even sees these kids.
 
Dec 31, 2014
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The 51 yr. old Elon Musk has been busy populating the earth.
One of the world's richest men, he has 10 children with 3 women,
6 with first wife, Justine, 2 with second wife, Claire and 2 with
current companion Zilis. This cultural icon is a creative man.

Sadly one of his sons died of SIDS.
 

Joes Place

HR King
Aug 28, 2003
123,493
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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.


I'd bet he'd walk 500 miles
And bet he'd walk 500 more
Just to be the man who walked a thousand miles
And duped the Twit-ter Board


Daadlatah!!! Daadlatah!!!
 

ericram

HR All-American
Nov 5, 2002
3,494
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Dec 31, 2014
12,494
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This guy?

“New York and Washington, DC, Apr. 28, 2003 -- The Securities and Exchange Commission, NASD and the New York Stock Exchange — following a coordinated investigation of allegations of undue influence of investment banking interests on research analysts at brokerage firms — today announced that Henry Blodget, a former managing director at Merrill Lynch, Pierce, Fenner & Smith, Incorporated and the senior research analyst and group head for the Internet sector at the firm, will be censured and permanently barred from the securities industry, and will make a total payment of $4 million to settle the charges against him.”

The Securities and Exchange Commission, NASD and the New York Stock Exchange Permanently Bar Henry Blodget From the Securities Industry and Require $4 Million Payment
 
Dec 31, 2014
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Josh Wolfe, known $TSLAQ member?

No wonder you have such terrible takes. Getting bad info from short and distort criminals.

When these people write these tweets and stories they do not tell you they have large short positions and Put options that stand to gain on the price of $TSLA stock lowering. The hit piece dropped by BI a few weeks back likely netted them millions of dollars.

They need unwitting marks like @WDSMHAWK to propagate their material and also use bots to spread their lies. They do not want Elon anywhere near Twitter ownership and neither do several other very powerful people and certain countries.
 
Last edited:
Dec 31, 2014
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Business Insider CEO tweets misinformation and uses bot army to spread. Twitter knows Business Insider has an army of bots and does not remove them. Strange strange strange…



 

WDSMHAWK

HR MVP
Jun 30, 2019
1,103
2,280
113
West Des Moines
I love how liberals are protecting twitter, the very same company and people that gave Donald Trump his platform to spread his hate and lies for half a decade while rebuffing calls to censor him.



Yeah because "Free Speech Warrior" Musk would turn Twitter into even more of a shithole.
 
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Hoosierhawkeye

HR Legend
Sep 16, 2008
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I agree with him but there is a right way to do it and a wrong way. The wrong way is doing it with multiple women.

The right way is by doing it with one woman your wife.

Another right way to help out might be by providing paid parental leave and free childcare for your employees.

What he's doing is about the same as saying "Crime is a problem" and deciding to become a vigilante laying out some street justice.
 

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