It is never a boring day in a world where the wealthiest man is Elon Musk. In early May, we featured a piece from Steven Pearlstein, where he reckoned that he wouldn’t be surprised if Musk eventually walks away from his somewhat hostile Twitter bid. Indeed, earlier this month, Musk withdrew his bid citing Twitter’s disclosure failures following which Twitter has filed a lawsuit demanding that Musk be forced to honour his bid. In this piece, another insightful journalist, Matt Levine digs into Twitter’s complaint and asks what should be the ideal outcome here. Given Twitter didn’t want the Musk bid in the first place, shouldn’t they be happy with the withdrawal? Levine, whilst acknowledging that we are still to see Musk’s response, cites some relevant points from the Twitter lawsuit which makes Musk’s withdrawal look not just potentially illegal but his conduct ‘a model of bad faith’ which had a damaging impact on Twitter’s franchise, its shareholders and employees alike. Levine lines up his argument thus:
“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” The securities law violation refers to his failure to disclose that he had crossed 5% holding within the time stipulated by the SEC.
…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….So Musk tried to find some pretext to get out of the deal…And because he is Elon Musk, he chose the most ridiculous imaginable pretext”
And the pretext he refers to is: “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…
..But it’s the pretext he chose, and he started tweeting about the deal being “on hold” because of the spam bot issue. He tweeted this “without any advance notice to the company.” Twitter’s executives found out the deal was on hold the same way we did, by reading Twitter, if in fact any of them read Twitter. Twitter’s chief executive officer, Parag Agrawal, then tweeted an explanation of how Twitter estimates its bot numbers, and Musk replied with a poop emoji. You had better believe that poop emoji is in Twitter’s complaint
…In addition to being in obvious bad faith, this pretext is just completely false. In weeks of complaining about bots, Musk has never produced the tiniest sliver of evidence that Twitter’s estimates are wrong in any way”
Levine goes on to cite other instances where Musk has been in violation of the merger agreement but he begins his conclusion by summing up the situation:
“The fact that Musk has been acting in transparently bad faith all along — that he started this process by violating SEC disclosure rules, that he agreed to join Twitter’s board and then backed out of that agreement, that “bots” were the reason he wanted to buy Twitter before they became his excuse for getting out of the deal, that he has disparaged Twitter and its executives from the time he signed the deal, that he violated his nondisclosure obligations and then boasted about it on Twitter — these things are not all relevant as a legal matter (some of them are), but they are as an equitable matter. They make it clear that Musk does not care about contracts, that he ignores the law, that he will not live up to his word. The point is to make the judge angry at him, so that she will make him do what he promised to do.”
The equitable aspect of the matter is brought forth by:
“As a matter of shareholder value, Twitter’s efforts here are unassailable: If Musk is hellbent on destroying Twitter, he should really pay its current shareholders $54.20 per share in cash first. But if you think of Twitter as something other than a pot of cash for shareholders — if you care about its employees or its users or its public mission — then the last thing you would want would be for this guy to own it.
One can sympathize with Twitter co-founder Ev Williams. “I’m sure there are legal/fiduciary reasons” that the board has to push Musk to close, he tweeted. “But if I was still on the board, I’d be asking if we can just let this whole ugly episode blow over. Hopefully that’s the plan and this is ceremony.” I mean, no: The shareholders definitely want their $54.20 rather than nothing, and the board really does have to try hard to get it for them. Also it is bad to let Musk go around destroying public companies on a whim without any consequences; Twitter’s board has sort of a public-service obligation to try to make him pay. Still, Williams has a point. He co-founded Twitter, presumably he likes Twitter, and now Elon Musk is trying to destroy it, and Twitter’s board is trying to force him to follow through. What is the good outcome here?
You could imagine a fantasy solution. A judge orders Musk to close on the deal but put Twitter in a public trust where he can’t meddle with it (or tweet). A judge says “never mind the damages cap in the merger agreement, I’m awarding $40 billion of punitive damages.” Other dumb stuff. We talked on Monday about the realistic outcomes: The judge will let Musk off the hook for $1 billion (or less), or the judge will order him to close the deal and buy Twitter, or Musk and Twitter will settle for him buying Twitter at a lower price, or they’ll settle for him walking away at a higher price. The last of these seems the best to me — Twitter’s shareholders are compensated, Musk is held to his word, he doesn’t actually own Twitter — but it requires Musk to agree to settle. And to get him to settle, I do think Twitter needs to convince him that they will otherwise get specific performance and make him close the deal. Nobody wants that, I don’t think (I hope!), but they have to fight for it anyway.”
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