Oh, Elon is messing with Twitter again…

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Musk is now saying seriously. Last week, Musk filed his amended answer and counterclaims to Twitter’s lawsuit. Here’s how his original answer started:

This action arises out of Twitter’s misrepresentations to the Musk Parties regarding the condition of the company and the “key metrics” Twitter uses to evaluate the number of users on its platform. While the Musk Parties negotiated for representations as to the truth of Twitter’s SEC disclosures, relying on their accuracy, the statements in these SEC disclosures were far from true. Instead, they contain numerous, material misrepresentations or omissions that distort Twitter’s value and caused the Musk Parties to agree to acquire the company at an inflated price.

Sounds like a contractual dispute: There’s some disagreement about whether Twitter’s statements about bots were true. But here’s the new one: 

The Musk Parties’ original Counterclaims explained that Twitter has been systematically misrepresenting its “key metric,” monetizable daily active users (“mDAU”), by understating the number of false and spam accounts included in mDAU and falsely claiming that mDAU was the best way to measure engagement and revenue growth. Stunning events over the last week, however, have revealed that the misrepresentations regarding mDAU were only one component of a broader conspiracy among Twitter executives to deceive the public, its investors, and the government about the dysfunction at the heart of the company. In what can only be described as one of the most significant whistleblower complaints in recent history, a widely respected security expert and former Twitter Chief Security Officer, Peiter “Mudge” Zatko, has submitted an 84-page whistleblower report to Congress, the FTC, the SEC, and the DOJ, outlining a series of explosive disclosures regarding misconduct within Twitter. … Those previously concealed problems are, according to Zatko, so severe that Zatko—who President Biden had asked to lead a national cybersecurity review—concluded that they threaten U.S. national security and democracy itself.

The new one is about “a broader conspiracy among Twitter executives to deceive the public, its investors, and the government” in ways that could “threaten U.S. national security and democracy itself.” This has gone from being a contractual dispute to being a massive conspiracy against democracy itself.

On the one hand: Yes, right, that is what Musk has to do. As I have argued from the beginning, he can’t really get out of this deal by quibbling over bot counting; he has to argue that there’s been a huge intentional fraud. Now he’s doing that explicitly.

On the other hand: It does raise the difficulty a bit, doesn’t it? He has to argue that there’s a huge conspiracy, that Twitter’s executives get together and rub their hands together and cackle about overthrowing democracy, that Jack Dorsey — Twitter’s co-founder, and Musk’s friend who urged him to buy the company — was in on it. The conspiracy stuff can sound a bit far-fetched.

Elsewhere, law professor Robert Anderson has a paper arguing that it might be hard for a court to actually grant specific performance in this case: that even if Musk loses all his claims about misrepresentations, fraud, conspiracy, etc., a court still shouldn’t force him to close the deal but should instead make him pay only a $1 billion (or maybe $2 billion) reverse termination fee. As I have written before, it is weird for the merger agreement to say:

  1. That because monetary damages can’t possibly compensate Twitter for the loss of the deal, the parties agree that there should be specific performance and Musk can be forced to close even if he doesn’t want to; and
  2. If there are money damages they are capped at $1 billion.

Anderson writes:

This is a cash sale of one of the most well-known and closely followed companies in the world. Although there are some difficulties assessing damages exactly, even in a case like this, they are minimal, and exact computation isn’t necessary. The shareholders of Twitter simply need to receive $54.20 in cash or cash equivalents. If damages aren’t adequate in this case, it is difficult to conceive of any M&A case in which they will be adequate. …

The primary reason damages would not be adequate in the sense of providing full expectation damages in this case is not because they are difficult to assess, but because Twitter agreed to cap them. Twitter is entitled to $1 billion in reverse termination fee if the financing falls through, and potentially an additional $1 billion in damages for a “knowing and intentional” breach of the obligation to secure financing. The fact that the parties agreed to cap monetary liability in the form of damages doesn’t seem like a reason to impose larger monetary liability through specific performance. Quite the contrary. In a merger agreement, the reverse termination fee is a highly negotiated provision the parties use to allocate risk; in contrast, the specific performance section is boilerplate text copied and pasted into the “General Provisions” at the end of the agreement. The boilerplate section at the end is an unlikely candidate for the parties to add $20 billion in settlement value to the otherwise carefully capped liability provisions.

As Anderson says, this is a standard feature of private-equity merger agreements: Damages tend to be capped at some relatively small number, but the agreements also allow specific performance. Here, specific performance is worth something like $20 billion to Twitter, while the damages are capped at $1 billion. You can sort of understand the rationale: Forcing Musk to buy Twitter might be fairer to him than forcing him to pay $20 billion of damages and not get Twitter; if he buys the company at least he has a shot of making his money back, while if he terminates and gets sued for damages and loses he just has to write a huge check for nothing. Still it is a weird binary, where Twitter gets either everything it wants or almost nothing.