The iron man strikes again.
But, come on, stop it already. Six weeks ago, Elon Musk signed a merger agreement in which he made a legally binding promise to buy Twitter Inc. for $54.20 per share. A few weeks later, he decided he didn’t want to pay $54.20 per share anymore, perhaps because he had grown bored of Twitter, or perhaps because the prices of social-media stocks, and of Musk’s company Tesla Inc., had fallen, and $54.20 looked pretty expensive.
The merger agreement does not, however, allow Musk to walk away because he changed his mind. He needed some pretext for walking away. He came up with what he thought was a good one: Twitter says, in its public filings, that no more than 5% of its “monetizable daily active users” are “false or spam” accounts, and Musk has a vague sense that there are more spam bots than that. (To be fair, a lot of his followers are bots.) He floated the idea that he could walk away from the deal because Twitter was lying about the spam bots.
To a non-lawyer I suppose this looked like a good pretext, but it was not. It was not for at least three reasons:
- Musk had not a shred — not even the tiniest bit — of evidence that Twitter’s estimates are wrong, and it seems very likely that they are right.
- Even if Twitter’s estimates are wrong, Musk could not get out of the merger agreement unless the error was likely to have a “material adverse effect” on Twitter’s business, and it absolutely would not.
- Musk has been talking about Twitter’s bot problem forever, and in fact he originally said that he wanted to buy Twitter in order to fix the bot problem, so no one could possibly believe him when he said that he wanted to walk away from the deal because he just discovered that Twitter has a bot problem.
So there were a few days when everyone talked about how Musk was trying to back out of the agreement, and about what Twitter could do to stop him, and then that died down when everyone realized that this pretext was terrible.
I wrote at the time:
While Musk has tweeted about not going ahead with the deal, and talked about it at a private conference for his fans, it doesn’t seem like he has sent any formal notice to Twitter saying that the deal is off. (Certainly neither Musk nor Twitter have made any SEC filings about that sort of notice, which you might expect if he’d sent one.) Perhaps his lawyers are less willing to ignore the agreement than he is, or at least need a better pretext than he’s managed so far.
Well. I guess he set his lawyers — led by Mike Ringler of Skadden, Arps, Slate, Meagher & Flom LLP — to work finding a pretext that they could stomach. And they found one, and today they filed it with the US Securities and Exchange Commission, in the form of a letter to Twitter threatening to call off the deal.
Their pretext is sort of the lawyer version of Musk’s pretext. The problem, say the lawyers, is not that Twitter has too many spam bots. The problem is that, when Musk asks for information about the spam bots, Twitter doesn’t give him the information he wants. From their letter:
Twitter has, in fact, refused to provide the information that Mr. Musk has repeatedly requested since May 9, 2022 to facilitate his evaluation of spam and fake accounts on the company’s platform. Twitter’s latest offer to simply provide additional details regarding the company’s own testing methodologies, whether through written materials or verbal explanations, is tantamount to refusing Mr. Musk’s data requests. Twitter’s effort to characterize it otherwise is merely an attempt to obfuscate and confuse the issue. Mr. Musk has made it clear that he does not believe the company’s lax testing methodologies are adequate so he must conduct his own analysis. The data he has requested is necessary to do so.
There is a technical bit of mergers-and-acquisitions lawyering here that might be worth explaining. In the merger agreement, Twitter makes representations, statements about its business that it promises are true. Arguably one of them is something to the effect of “not much more than 5% of our monetizable daily active users are spam bots.” Musk thinks, or says he thinks, that this representation is not true. But even if he’s right, he can’t get out of the deal, unless it is untrue and would have a “material adverse effect” on Twitter’s business. If in fact 90% of Twitter’s users are bots, it knows that, and it has been lying to advertisers for years, then, uh, sure, maybe. But in any plausible case, there will not be an MAE, so he still has to close the deal and pay $54.20 per share. Merger agreements are written this way so that buyers can’t change their minds and come up with some trivial pretext — some tiny error in the representations — to get out of the deal.
But in the merger agreement, there are also covenants, promises that Musk and Twitter make to each other about what they will do going forward, between the signing of the merger agreement and the closing. If Twitter breaches a representation, Musk still has to close unless the breach causes a material adverse effect. But if Twitter breaches a covenant, Musk can walk away: He doesn’t have to close unless Twitter “shall have performed or complied, in all material respects, with its obligations required under this Agreement.” There is no MAE requirement: You just have to comply with the covenants.
And one of the covenants is that Twitter “shall … furnish promptly to [Musk] all information concerning the business, properties and personnel of [Twitter] as may reasonably be requested in writing, in each case, for any reasonable business purpose related to the consummation of the transactions contemplated by this Agreement.” Another one is that Twitter will “provide any reasonable cooperation reasonably requested” in connection with Musk’s debt financing.
Musk, as a non-lawyer, came up with a pretext that is like “Twitter told me something untrue about its bot problem, so I can walk away.” That sounds like it might work, but doesn’t work. But Musk’s lawyers have a better pretext. It’s something like “keep asking them for more information about their bot problem; eventually you’ll ask questions they won’t answer, and then you can walk away.”
So they write:
Under various terms of the merger agreement, Twitter is required to provide data and information that Mr. Musk requests in connection with the consummation of the transaction. … Mr. Musk is entitled to seek, and Twitter is obligated to provide, information and data for, inter alia, “any reasonable business purpose related to the consummation of the transaction” (Section 6.4). Twitter must also provide reasonable cooperation in connection with Mr. Musk’s efforts to secure the debt financing necessary to consummate the transaction, including by providing information “reasonably requested” by Mr. Musk (Section 6.11). …
As Twitter’s prospective owner, Mr. Musk is clearly entitled to the requested data to enable him to prepare for transitioning Twitter’s business to his ownership and to facilitate his transaction financing. To do both, he must have a complete and accurate understanding of the very core of Twitter’s business model—its active user base.
And then they threaten that Musk will walk away if he doesn’t get the information he wants:
Based on Twitter’s behavior to date, and the company’s latest correspondence in particular, Mr. Musk believes the company is actively resisting and thwarting his information rights (and the company’s corresponding obligations) under the 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 does not say what information Musk wants — it references previous letters, dated May 25 and May 31, asking for the information, but those have not been made public — but it makes it clear that Musk is not looking for information about how Twitter came to its conclusion that fewer than 5% of monetizable daily active users are bots. He is not looking to understand or test Twitter’s methodology. Instead, he wants to “conduct his own analysis,” which I would think would require raw data about Twitter’s users. Last month Twitter Chief Executive Officer Parag Agrawal tweeted a thread about how Twitter does this analysis, noting that Twitter “uses both public and private data (eg, IP address, phone number, geolocation, client/browser signatures, what the account does when it’s active…) to make a determination.” Presumably if Musk wants to “conduct his own analysis,” he will want the same sorts of identifiable private data that Twitter uses.
Again, I don’t know exactly what he’s asking for, but in general I can understand why Twitter would be nervous about sharing user data with Musk. For one thing, there are all sorts of regulatory and risk reasons to be nervous about sharing user data with someone who, for now at least, does not work at Twitter. For another thing, Musk has been publicly trolling Twitter about the bot problem, and about everything else, for weeks now, and there’s no reason to think he would be particularly responsible with this information. His lawyers write:
Mr. Musk will of course comply with the restrictions provided under Section 6.4, including by ensuring that anyone reviewing the data is bound by a non-disclosure agreement, and Mr. Musk will not retain or otherwise use any competitively sensitive information if the transaction is not consummated.
But this is not much comfort, because Musk has constantly ignored the restrictions of the merger agreement, including by tweeting disparaging things about Twitter. He himself has boasted publicly that he violated a non-disclosure agreement with Twitter by tweeting about Twitter’s bot methodology! If you give him sensitive user data he is just absolutely going to tweet about it, and trusting his promises not to would be dumb. And if he does break his promises, what can Twitter do? Sue him to call off the deal? Twitter doesn’t want to call off the deal. Musk does!
Still, this pretext is better than Musk’s pretext, for at least three reasons:
- As closing conditions for the merger, representations are qualified by MAE, but covenants by “in all material respects.” If Twitter does not comply with its covenants, Musk can walk away, so this makes for a good threat.
- The representations are limited to what the merger agreement actually says, but this covenant — the one about furnishing information — is limited only by (1) Musk’s (and his lawyers’) imagination and (2) the somewhat fuzzy standard of “any reasonable business purpose related to the consummation of the transactions.” So Musk can ask Twitter, like, “give me the cell phone numbers of every one of your monetizable daily active users so I can call them and see if they’re bots,” and Twitter will have to decide if that is reasonable, if it violates any laws, etc. If they say no, Musk can disagree, and it might end up in court, with Musk having the ability to walk away if he wins. If they say yes, Musk can just keep asking for more things. “Tell us what all of your users were thinking about last Thursday,” why not.
- Because Musk really has been talking about solving the bot problem, and because this request can be characterized as helping him do that, it doesn’t sound as much like a lie as his pretext does. “As Twitter’s prospective owner, Mr. Musk is clearly entitled to the requested data to enable him to prepare for transitioning Twitter’s business to his ownership,” says the letter: If he’s going to clean up the bots, he needs information about the bots, and he is allowed to ask for it now.
I mean, to be clear, it isn’t a good pretext. It is, for instance, very hard to imagine that Musk’s banks are clamoring for detailed information about spam accounts to line up their financing; Twitter has raised debt financing in the past with its existing bot disclosure. Nor is it clear what Musk’s “reasonable business purpose related to the consummation of the transactions” is. And because it is so clearly part of Musk’s broader trolling operation, it is hard to imagine him winning if this ends up in court: If he refuses to close because Twitter won’t humor his bot-fishing expedition, it seems unlikely that a Delaware court will side with him. But it does raise the risk for Twitter, which gives him a bit more leverage to try to renegotiate the price. It is all going to get so much dumber.
In other Twitter M&A news, on Friday the deal cleared US antitrust review with no problems. One possibility is that Musk will keep sending nasty letters and tweets about bots, and the people — including the ones working for him — whose job it is to get the deal done will keep working to get the deal done, and one day Musk will be mid-sentence typing a nasty tweet about Twitter and find out that he owns it.