Elon Musk did something “funny” today,
None of this makes sense! Because
- “Temporarily on hold” is not a thing. Elon Musk has signed a binding contract requiring him to buy Twitter. Legions of bankers and lawyers and Twitter employees and special-purpose-vehicle promoters are working to fulfill his legal obligation to get the deal closed. “The parties hereto will use their respective reasonable best efforts to consummate and make effective the transactions contemplated by this Agreement,” says the merger agreement. (Section 6.3(a).) He can’t just put that “on hold.”
- That contract does not allow Musk to walk away if it turns out that “spam/fake accounts” represent more than 5% of Twitter users. We discussed this last month, when Twitter admitted in a securities filing that it had (slightly) overestimated its daily active users for years. The merger agreement contains a provision that allows Musk to walk away if Twitter’s securities filings are wrong — and this 5% number is in its securities filings — but only if the inaccuracy would have a “Material Adverse Effect” on the company. (See Sections 4.6(a) and 7.2(b).) That is an incredibly high standard: Delaware courts have almost never found an MAE. An MAE has to be something that would “substantially threaten the overall earnings potential of the target in a durationally-significant manner,” the courts have said; there is a rule of thumb that an MAE requires a 40% decrease in long-term profitability. If it turned out that 6% or 20% or 50% of Twitter accounts are bots, that will be embarrassing and might even reduce Twitter’s future advertising revenue, but will it be an MAE? No.
- “Pending details supporting calculation” is not how this works. This disclosure — that “the average of false or spam accounts … represented fewer than 5% of” Twitter’s monetizable daily active users — has been in Twitter’s securities filings for many years, always with a caveat that “in making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated.” Musk had the opportunity to read these filings before offering to buy Twitter, and he had the opportunity to do due diligence on these numbers before signing the deal. (He declined.) He can’t now go to Twitter and say “actually now you need to prove that your user numbers are right.” If he wants to walk, he has to prove that they’re wrong, and also that they’re wrong in a way that has a material adverse effect on the business. Which he obviously can’t do.
So, what the heck is going on here? My initial guess was that Musk was joking, that this was just a way to troll people online. It is, after all, Friday the 13th. “Still committed to acquisition,” he tweeted two hours later. Obviously this would be a bad joke, insofar as it “sent Twitter stock tumbling as much as 25% in premarket trading.” You are not supposed to say things that aren’t true and that will affect the stock of a public company that you are trying to buy. That is what is usually called “securities fraud.” Musk has a long history of lite securities fraud: He used to make jokes about Tesla Inc. introducing new products or going bankrupt, and he notably settled a fraud lawsuit with the U.S. Securities and Exchange Commission because he tweeted that he had secured funding to take Tesla private but had not. If he just woke up feeling frisky and tweeted a joke about Twitter’s bot accounts, a joke that wiped billions of dollars off Twitter’s market capitalization, that would be totally unsurprising. Bad! Not really allowed! But very much in character.
Another possibility is that Musk really is laying the groundwork to walk away from his deal with Twitter. There is a popular view that Musk has the option to abandon the deal if he pays a $1 billion breakup fee. As we have discussed around here, that just isn’t true: The contract gives Twitter the right to force him to close, and put up the $27.5 billion of equity that he has committed to the deal, as long as his debt financing is available. (Section 9.9(b).) The contract also gives Twitter the right to go to court to force him to try to get that debt financing. (Sections 6.10(a) and 9.9(a).) There is, so far, no reason to think the debt financing won’t be available — his banks are large and solvent and have signed reasonably unconditional commitment letters — and so no reason to think he can get out of the deal.
Elon Musk has made it very clear that the rule of law simply does not apply to him, and this has worked well for him. If he wants to ignore the merger agreement that he signed, he will. If you take him to court, he will put up a brutal fight and make things as unpleasant as possible for you. This puts his counterparties, like Twitter, in a tough position. They have a contract. But so what?
The third possibility, most obvious possibility is that Musk is going to make use of that uncertainty to renegotiate the price. “I’d like to pay $42 instead of $54.20,” he can say to Twitter’s board, “and if you say no I will walk away and you can sue me and, while you will be right, I will make your life horrible and might even win.” Given the choice of a long, miserable and uncertain lawsuit to force Musk to close at $54.20, or a semi-amiable restriking of the deal at $42 (a number I just made up, to be clear), Twitter’s board might take the $42.
This would be a hugely annoying outcome? For one thing, it would be a real failure by Twitter’s board. I have been critical of the board’s performance in this deal: Its quick decision to sell at the first price Musk offered, with no protections for Twitter’s culture or product, seemed to me like the actions of a board that doesn’t really understand or care about the company and a management with no good ideas. On the other hand, since they struck the deal, tech stocks have collapsed, which makes the board’s decision to sell at $54.20 look smart. By luck or design, they got a great price for their shareholders at exactly the right time.
Anyway as of noon today there was no securities filing from Twitter or Musk about the deal supposedly being “on hold,” no press release or tweet from Twitter investor relations or Chief Executive Officer Parag Agrawal, and no further clarification from Musk. The stock was trading a bit above $41, down almost 9% from yesterday’s close, almost 25% below the deal price. I feel for the lawyer who is working right now to file Musk’s tweet with the SEC: The filing will have to explain the tweet, and what is there to say?