Oh Elon, enough is enough

Posted by

Yesterday Twitter Inc. sued Elon Musk in Delaware to hold him to his agreement to buy Twitter for $54.20 per share. Twitter’s lawyers are hoping for a quick trial in September, so that the deal can close on schedule in October. You can read Twitter’s complaint here. Here’s the gist of it:

Having mounted a public spectacle to put Twitter in play, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he — unlike every other party subject to Delaware contract law — is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away. This repudiation follows a long list of material contractual breaches by Musk that have cast a pall over Twitter and its business. Twitter brings this action to enjoin Musk from further breaches, to compel Musk to fulfill his legal obligations, and to compel consummation of the merger upon satisfaction of the few outstanding conditions.

If you have been following this attempted acquisition, nothing in this complaint should be confusing to you. Musk secretly bought a 9.1% stake in Twitter, violating securities laws in the process, then announced that stake and agitated to join Twitter’s board:

Starting in January 2022, Musk began purchasing Twitter stock. By March 14, 2022, he had secretly accumulated a substantial position — about 5% of the company’s outstanding shares. SEC regulations required that he disclose that position no later than March 24, 2022. Musk failed to disclose, and instead kept amassing Twitter stock with the market none the wiser. By April 1, 2022, Musk had accumulated about 9.1% of the company’s outstanding shares, still in secret. …

Meanwhile, on March 26, 2022, Musk spoke with two Twitter directors, Jack Dorsey and Egon Durban, about the future of social media and the prospect of Musk’s joining the Twitter board. Soon after, Musk told Twitter CEO Parag Agrawal and Twitter board chair Bret Taylor that he had in mind three options relative to Twitter: join its board, take the company private, or start a competitor.

So he signed an agreement to join Twitter’s board, then changed his mind and backed out of the agreement. Instead, he sent Twitter a take-it-or-leave-it unsolicited offer to buy the company for $54.20 per share in cash, and tweeted some cryptic threats to launch a tender offer if Twitter’s board didn’t sell. He also lined up committed financing from banks. So Twitter’s board negotiated a merger agreement with Musk, and they signed it on April 25.

Then the stock market went down:

The risk of market decline, which was Musk’s alone to bear under the merger agreement, materialized. Soon after signing, the U.S. capital markets took a turn for the worse. Within a week after April 25, 2022, the date the merger agreement was executed, Musk elected to sell 9.8 million Tesla shares to finance the merger at prices as low as $822.68 per share, substantially below their pre-Twitter-signing price of $1,005 per share. 

So Musk tried to find some pretext to get out of the deal:

Musk wanted an escape. But the merger agreement left him little room. With no financing contingency or diligence condition, the agreement gave Musk no out absent a Company Material Adverse Effect or a material covenant breach by Twitter. Musk had to try to conjure one of those.

And, as we all know, Mr. Musk decided to use spam bots as an excuse to get out.

However, Musk announced that he wanted to buy Twitter because he thought there were too many spam bots. He sent in an unsolicited offer to buy Twitter, did no due diligence at all about spam bots, and asked Twitter for no representations about spam bots. He imagined that there were lots of spam bots, and he was eager to “defeat” them. And then the stock market went down, so now he is pretending that he was tricked into buying Twitter because they went around lying to him about how few spam bots there were. This pretext is bad:

Musk’s exit strategy is a model of hypocrisy. One of the chief reasons Musk cited on March 31, 2022 for wanting to buy Twitter was to rid it of the “[c]rypto spam” he viewed as a “major blight on the user experience.” Musk said he needed to take the company private because, according to him, purging spam would otherwise be commercially impractical. In his press release announcing the deal on April 25, 2022, Musk raised a clarion call to “defeat[] the spam bots.” But when the market declined and the fixed-price deal became less attractive, Musk shifted his narrative, suddenly demanding “verification” that spam was not a serious problem on Twitter’s platform, and claiming a burning need to conduct “diligence” he had expressly forsworn.

Now, right after Elon Musk’s lawyer filed for backing off of the deal, Twitter decided to go to court with him.

I’m not a judge, hell I’m not even a lawyer, but I believe there is little to discuss here. Elon Musk is a hypocrite and deserves to be punished. Mr. Musk’s behavior caused Twitter’s stock price plunge and Twitter’s stakeholders holding the bags.