The state of play is:
- Elon Musk wants to get out of his deal to buy Twitter Inc. for $44 billion for reasons of his own. The market crashed since he signed the deal, making him less rich and Twitter less valuable, so he doesn’t want to pay the $44 billion. Or he has realized that owning Twitter would be a headache and not that fun. Or he’s gotten bored, or he just thinks it’s funnier to get out of the deal. I don’t know.
- The definitive merger agreement that Musk signed does not allow Musk to get out of the deal because he changed his mind.
- So he has spent the last few months looking for excuses that do let him out of the deal. If Twitter committed fraud to trick him into signing the merger agreement, or if it has suffered certain kinds of “material adverse effect” on its business, or if it made misrepresentations in the merger agreement that would likely lead to a material adverse effect, or if it has violated its covenants under the merger agreement, then Musk can walk away from the deal.
- Musk found some excuses and sent Twitter a letter terminating the merger agreement, and Twitter wrote back to say “no these excuses are no good, you still have to close, see you in court,” and there’s a trial scheduled to start Oct. 17.
- The first set of excuses that Musk came up with — claims that Twitter is lying about how many spam bot accounts it has, claims that Twitter has violated its covenant to give Musk information that he asks for (by not giving him enough spam bot information), claims that Twitter has violated its covenant to operate in the “ordinary course of business” (by firing a few people) — were not very good.
- But he kind of gets unlimited chances, and he keeps looking around for new excuses. And he’s the richest person in the world, so if you find an excuse for him, that seems career-enhancing.
- Last month, Peiter “Mudge” Zatko, Twitter’s former head of security, publicized a whistle-blower complaint that seemed weirdly written for Musk. (It has a section titled “Lying about Bots to Elon Musk,” even though Zatko seems to agree with Twitter that its actual disclosures about bots are accurate.) Zatko made a bunch of claims about Twitter violating legal settlements, having bad information-security practices and hiding them from the board and shareholders, misusing intellectual property, all sorts of miscellaneous stuff. Could any of those things amount to fraud, or a material adverse effect? Maybe?
- So Musk sent Twitter another termination letter, saying, in effect, I know I’ve already terminated this merger agreement for the bot stuff, but just in case I am terminating it again for the Mudge stuff. And Twitter sent back a letter saying “no,” and this stuff got added to the list of issues in the trial, which is still scheduled to start Oct. 17.
Here is the update from Friday:
- It turns out that on June 28, Twitter signed a severance agreement with Zatko and paid him $7.75 million.
- The merger agreement (section 6.1(e)) says that Twitter can’t “grant or provide any severance or termination payments or benefits to any [employee] other than the payment of severance amounts or benefits in the ordinary course of business consistent with past practice” without Musk’s permission.
- Twitter didn’t ask Musk for permission.
- Another covenant breach!
- Musk duly sent Twitter another letter terminating the merger agreement for the third time.
- Twitter sent Musk another letter back saying “no.”
I have to say that, of Musk’s excuses so far, this is probably my favorite. The bot ones are really bad, man. Zatko’s substantive claims seem like run-of-the-mill security grousing, not enough to constitute fraud or a material adverse effect. Musk’s previous claims about covenant violations seem like silly nitpicks. But this one has a certain intuitive appeal. This is: “Your head of security came to you with damning revelations and to keep him quiet you paid him $7.75 million. That is certainly not an ordinary-course payment, and you were obligated, under the terms of the contract, to get my approval for non-ordinary-course severance payments. But you didn’t because you knew these damning revelations were damning, and you didn’t want me to see them and walk away.” That does sound like a bad covenant breach!
We have not seen Twitter’s defense yet, and it’s not even clear that this will be added to the pile of things to be disputed at trial. I assume that the defense is that this $7.75 million payment is in fact “in the ordinary course of business consistent with past practice”; in particular, to the extent that the $7.75 million is mostly deferred compensation that he was entitled to anyway then it could in fact be pretty ordinary-course. (That seems to be the case: “The settlement came after monthslong mediation over tens of millions of dollars in potential pay.”)
Still if I were a company in a merger agreement and I was about to sign a $7.75 million severance agreement with my aggrieved former head of information security I would definitely want to run it by the buyer first. That is just a bad surprise; you don’t want to look like you’re hiding the ball. In fairness to Twitter, by this point things were already bad: Musk tweeted that the deal was “temporarily on hold” back in May, and by June 28 Musk and Twitter were exchanging increasingly snippy letters that were inevitably going to end with Musk terminating the deal. If Twitter had run the severance agreement by him, he would have said no, and he would have used it as another excuse to terminate. And now he’s doing that anyway.
Still if none of the other stuff had happened — if Musk was working diligently to close the deal and then a whistle-blower showed up saying “I have lots of evidence that Twitter is doing fraud, and they paid me $7.75 million to go away and kept it secret from you” — then you would think, “huh, yes, that seems bad, and if Musk wanted to get out of the deal now I wouldn’t blame him.” That’s not the situation we’re in, but you can see why Musk would add this to the pile.
The main point I want to make here is that this is very generalizable. If you know something bad about Twitter, or if you have been reading the merger agreement online and think there’s a clause of the agreement that Musk can use to get out of it, shoot him a tweet. If you’re right, or frankly if you’re wrong, his lawyers can put your claims into a letter and send it to Twitter saying “I know we’ve already terminated this agreement three times, but we’re doing one more.” Musk can terminate as often as he likes; if he terminates the agreement 100 times with 100 excuses and 99 of them are laughed out of court, but the 100th works, then that’s good enough for him.