Elon Musk tweeted Friday morning that his deal with Twitter was “on pause,” based on nearly two-week-old news that bots made up less than 5 percent of Twitter users — something Musk has vowed to eliminate if he becomes the owner of the social media platform.
Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of usershttps://t.co/Y2t0QMuuyn
He later tweeted that he was “still committed to acquisition” but that didn’t stop people from speculating that this was his first step toward walking away from a Twitter acquisition, which has gone through more fits and starts than a baby blue bird desperately trying to leave the nest.
If Musk does decide he is done with Twitter, it’s not like he can just pay the $1 billion termination fee and walk out the door. So what would he have to do? And is it likely he’ll try? Grid Tech Reporter Benjamin Powers spoke with Brian Quinn, an expert on corporate law and mergers and acquisitions, about Musk’s contract, his tweets and how this may be a renegotiating technique rather than a ploy to bail out of the Twitter deal.
Brian Quinn and Benjamin Powers discuss the implications of Elon Musk's recent tweet that the Twitter deal is "on pause."
A transcript of this interview can be found below.
Grid: So Brian, thank you so much for talking to me. I’d love for you to just share a little bit of background about yourself. And then we can dive into the latest Musk and Twitter saga that’s going on.
Brian Quinn: Yeah, I’m a professor of law at Boston College Law School. I teach corporate law, mergers and acquisitions and venture capital.
G: Awesome. So obviously, Elon Musk tweeted earlier this morning that the deal that he was proposing for Twitter was on pause, based on a, you know, over a week-old Reuters article that identified, you know, less than 5 percent of Twitter users as potential bots, and you know, potentially spam bots. And there’s been a lot of conversation about whether this just could be a pretext for him to try and exit the deal or walk away from it entirely. But I think you believe that’s a lot more easier said than done, and it’s quite complicated. Could you walk me through some of the, you know, the issues there?
BQ:Sure. This morning, I saw that, that tweet from Musk and my first thought was that he was shocked that there’s gambling going on in Twitter. You know, the idea that there are bots, and bots are all over Twitter, is not new to anybody. It’s not a surprise. It’s well known. I think, in fact, it’s even one of the reasons why he decided to acquire the company. So I say that because it provides him with, in effect, a pretext for him to attempt to renegotiate the deal. So the deal has been described, you know, people say, “Oh, he just put down a billion dollars and — walk away.” But it’s not, it’s not that easy. And, in fact, what he’s doing right now is a pretty common tactic. You know, we’ve been down this particular road, you know, I want to say 1,000 times. And, I mean, what’s going to happen next is pretty predictable, I think.
G: And so, you know, I think that you and I have spoken previously, and that billion dollar walkaway fee is kind of the one that’s being tossed about right now, but as you said, it’s more complex than that. Could you lay out why it is more complicated, because certainly I think that’s, that’s a big talking point right now. And I want to make sure that our audience understands that it’s not just as easy as, you know, paying a billion and walking away.
BQ: Sure. So in the merger contract, the merger contract — the parties negotiate for certain remedies, right. And so one of the remedies — and this is in the event of a contractual dispute, or a termination of some sort— they contract for remedies. In the context of law — this is, this might be too much in the weeds for your audience — but in the context of law, when you sign a contract and then the contract is breached, you can go to court and get a cash remedy equal to whatever your expectation was, with respect to that contract. “I did this deal thinking I was going to make $50, you breached the contract, I want to get by my expected profit, that $50 from this contract,” and the judge will award that expected value from the contract. It’s really hard to do that in the context of a merger. So what parties do is they agree, essentially, to liquidated damages. In the event of a breach, well, we’re not going to allow one party or the other party to go to court and ask for their expectation in the transaction. We’re going to give them something else. And the parties negotiate. And in this case, they negotiated for a liquidated damages provision — a termination fee, in the event of a termination by Musk, of a billion dollars. Now that’s not the only remedy available. It’s one — it’s a limitation on monetary remedies.
So Twitter can’t go to the court and say, “Court, your Honor, we were expecting $50 billion worth of value for our shareholders, we want that.” All they can get is a billion dollars in cash. In the alternative, the company has the opportunity to ask for what’s called “specific performance.” In the event that the contract can be completed — they’ve met all the closing conditions, and the debt financing is in place ready to go — the parties have agreed to permit the company to ask a court for an order for specific performance — an order from the court instructing Musk to complete the deal, right? And that’s — whether they get liquidated damages or specific performance is at the option of the company, not at the option of Musk.
G: Yeah, and I think that’s really important because what that means, you know, from my understanding — and please correct me if I’m wrong — but at a high level that Twitter can take Musk to court to complete this deal, if Musk has the funding on hand, which is still the case right now. And I think as important is thinking about, you know, obviously Musk has said he really wants to tackle spambots and you know, other bots on Twitter. So he has been well aware of this. And this would not be — seemingly be a case where there has been a, a material change in the value of the company based on whatever realizations, you know, maybe he came to — from this Reuters article, this is something that would have been a part of a regular due diligence for a company.
And so my understanding and feel free to again, correct me if I’m mistaken here, is that if he tries to break off any sort of contract based on this, that doesn’t really hold water, and Twitter could really push for him to complete it, particularly given all the news about the, you know, fundraising that he is doing to try and lessen his monetary vulnerability, let’s say.
BQ: Yeah, so you want to think about this in the context of a kind of a typical private equity deal, which this is not. But in a typical private equity deal, you know, the seller is dealing with, you know, a highly leveraged buyer. And, you know, in the event the buyer is unable to come up with the debt financing to make the deal happen, the buyer just doesn’t have the pockets to make it work, right? So, if the buyer were just to collapse on the financing, you know, the seller could go and like, try to get a court order for the buyer to complete the deal (specific performance) but it would really be to no avail, if there’s no debt financing to support the deal. That’s not this situation here. Because the debt financing is in place. And that’s not really what’s at issue or what the concern is. I think the real concern is that the equity supplier, Musk, might just want to say, “Hey, I don’t want to put up that much money, I think I paid too much, I want to pay less.” And that’s not really an argument that’s going to cut a lot of water, you know — having buyer’s remorse. And so it’s not the kind of thing that’s going to survive much of a challenge.
G: And so thinking about that, and there’s so much more we could get into this, but I mean, what do you think are the next steps at play here in terms of, you know, what, what he’s tweeting, what this could look like? And I mean, I hope none of — none of us are maybe in the speculation game, but does this seem like a step in any one direction to you?
BQ:So I mean, the strategy here is, as I said earlier, is pretty straightforward and very well known. So typically, in a deal like this or in a transaction like this buyer, who might be having buyer’s remorse, “Geez, I just paid way too much money for this, this company,” searches for some pretext upon which not to do the deal. And typically what they’ll look for, what people will point to is, “Well, there’s been some material adverse event, some material adverse event has occurred. And as a result of that, things that you told me before are no longer true, and I can no longer do this deal. Get me out of here.” And if that’s the case, a buyer can usually walk away without paying any damages, right, can walk away without paying any fees to walk away — unscathed as it were. And so what’s happened, what looks like — what looks to be happening here is — again, it’s hard to attribute much strategy.
But this is, this is the way it seems to appear — Musk points to bots and saying, “Well, geez, many more bots are here than we have ever anticipated, such that perhaps your filings with the SEC are incorrect. And that results in a material adverse event. Consequently, you are in breach of your reps and warranties. I no longer have to complete the deal. I can walk away.” Now what this does is it sets up the renegotiation, which is where al these things tend to go. Buyer threatens to walk claiming some material adverse event, unless they can get the same company at a lower price. Seller’s board at that point has to make some decision. You know, what’s the real value? Or what’s the real value of the buyer’s claim? I mean, is it real? Is it going to survive? Is there any chance they could possibly win? Because if they win, the buyer walks away. Right? And they then balance that against well, how much can we give up perhaps to make that particular risk go away, and then there’s a back and forth and a renegotiation can ensue against the backdrop of this material adverse event. Now, you know, in truth, like the claim that, oh, well geez, there are bots here, like surprise, surprise, that’s not a surprise to anybody, right? So it’s not really a claim, I think that has a lot of pull.
You know, I expect if he were to try to go to a court and have a court give him a declaratory judgment, saying that, oh, well, there’s a material adverse event such that — such that he doesn’t have to close because of the bots — you know, I suspect no court’s gonna give him that. I think he’ll be forced to close. The real question here is, what’s the risk tolerance of the Twitter board? Do they have enough spine to stand up and say, no, we want you to complete the deal as promised at $54.20, right? Given the way the Board has acted so far, I doubt they have that kind of spine. But it’s, you know, it shouldn’t be a hard call from their perspective just to stick to their guns.
G: Yeah and I mean, even looking, you know, I’ve been refreshing, Edgar, which is the SEC filings database all day just to see if Twitter would file something because just tweeting out that the deal is on pause, it doesn’t actually mean anything from my understanding. It’s not, you know, at least in the, in the view of all the regulatory entities that be in the contract and everything else, like nothing else has been brought up to substantiate or make that an effective actual claim. And am I wrong in that? Or is this just sort of a case of — I mean, certainly, Musk is a fan of creating a bit of chaos where he goes, particularly through Twitter, but yeah, it doesn’t seem to me that there’s a lot of ground to stand on, because there’s been no other filings from him or Twitter on this regard.
BQ: Yeah, no, I wouldn’t look at the filings. Again, this is all about this, trying to set up a renegotiation. And this is not uncommon at all. If you look back to Tiffany and Louis Vuitton at the start of the pandemic, where Louis Vuitton purchased Tiffany, they signed the deal, and then the pandemic happens. And the next thing you know, Bernard Arnault starts to talk to the New York Times, the Wall Street Journal about how much well, geez, I don’t think I want to do the deal. And then that moves into renegotiation phase. And this is a version of that.
The fact that he tweets out that the deal is on hold has no operative value. I mean, the lawyers are still doing what the lawyers do. The bankers are still doing what the bankers do. No one has put their pencils down. But he is signaling quite openly that, hey, maybe it’s time to renegotiate a deal. And again, now it’s up to the board of Twitter. Do they want to renegotiate? Are they willing to take the risk of just pushing forward? You know, and that’s going to be up to them. And I think they’re going to get counsel from lawyers and the bankers as to whether or not that’s a good idea.
Audio edited by Olivia Reingold.
Thanks to Alicia Benjamin for copy editing this article.