Making Sense of the Musk v. Twitter Standoff

As the world's news cycle grows shorter by the day, events with wide-ranging consequences scarcely have a twenty-four-hour lifespan in the headlines. Few issues aside from COVID-19 and the Russian incursion into Ukraine exhibit staying power. Count the increasingly convoluted legal battle between the world's richest man, Elon Musk and Twitter, Inc. (“Twitter”) as one of these issues. (Forbes). Musk has been attempting for months to void his attempted Twitter takeover. (Giles Turner, Bloomberg). With new developments in the case making headlines every week, it is difficult to keep track of how the case began, where it stands, and the consequences of a ruling in what has turned into a high stakes tug of war.

Musk laid the foundation for the back-and-forth dispute between himself and Twitter on April 4, 2022, when Musk announced he had purchased a 9.2% stake in the company (worth $2.9 billion), making him Twitter's largest shareholder. (Sarah Needleman and Will Feuer, The Wall Street Journal). On April 5, 2022, Twitter submitted a filing to the Securities and Exchange Commission (“SEC”) that would have given Musk a seat on the board of directors until 2024. (SEC). However, five days later, Twitter CEO Parag Agrawal announced Musk would not be joining Twitter's board. (Parag Agrawal, Twitter). Thereafter, Musk offered to purchase Twitter outright for $54.20 per share in cash, or $43 billion on April 14, 2022. (SEC). This proposal prompted Twitter, just a day later, to enact a poison pill provision to stop Musk's hostile takeover bid. (Cara Lombardo, The Wall Street Journal). Poison pills act to block the accumulation of ownership stakes above a predetermined threshold of a company’s outstanding shares by distributing additional free or discounted shares to all shareholders, save those who trigger the provision. (Adam Hayes, Investopedia). In an abrupt about-face, Twitter’s board of directors agreed to be acquired by Musk for his offer price of $43 billion on April 25, 2022. (SEC).

On May 17, 2022, Musk announced that his bid to purchase Twitter “cannot move forward,” citing his concerns about the methodology Twitter employs to calculate the percentage of spam accounts on its platform. (Lauren Hirsch, et. al., The New York Times). Hours later, Twitter stated it intended to “close the transaction and enforce the merger agreement” between Musk and the social media platform. Id.

On July 8, 2022, Musk moved to officially terminate the deal stating that Twitter was in material breach of multiple provisions of the purchase agreement. (SEC). In a letter to Twitter CFO, Vijaya Gadde, Musk’s attorneys alleged the social media giant appeared to have made false and misleading representations, which Musk relied upon when entering the agreement, from which he would likely suffer a “material adverse effect.” (Skadden, Arps, Slate, Meagher & Flom). Under the concept of “material adverse effect,” a buyer must show that a company’s actual business differs dramatically from what they agreed to buy. (Cara Lombardo and Sarah Needleman, The Wall Street Journal). In response, Twitter sued Musk in the Delaware Court of Chancery on July 12, 2022, exercising the contract’s specific performance clause to compel Musk to complete his purchase. (Becca Shimmel, Investopedia). Musk promptly countersued, accusing Twitter of fraud. (Cara Lombardo, et. al., The Wall Street Journal). Musk’s attorneys alleged Twitter’s disclosures to Musk show that despite Twitter’s claims of “having 238 million ‘monetizable daily active users,’ those users who actually see ads (and thus, would reasonably be considered ‘monetizable’) is about 65 million lower than what Twitter represents.” Id.

On the heels of whistleblower complaints levied against Twitter from their former head of security Peiter Zatko, Musk’s arguments have gained traction. (Kathryn Hardison, The Wall Street Journal). Zatko, fired by Twitter in January, claims that Twitter executives, including CEO Parag Agrawal, deliberately undercounted the prevalence of spam on the platform. (Sarah Needleman, The Wall Street Journal). Zatko’s submission further stated he “uncovered extreme, egregious deficiencies by Twitter in every area of his mandate,” which covered privacy, digital and physical security, platform integrity and content moderation. Id. Bolstering Zatko’s claims of deficient privacy and security measures, on August 9, 2022, another former Twitter employee was convicted of spying for Saudi Arabia after an FBI complaint alleged the former employee had sold private user data to the Saudi royal family. (Barbara Ortutay and Matt O'Brien, Associated Press). Chancellor Kathaleen McCormick, who is presiding over the Musk-Twitter dispute, granted a motion by Musk to amend his countersuit to include Zatko’s claims. (Lauren Feiner, CNBC). The inclusion of Zatko’s claims may work to lend credence to Musk’s assertion that he suffered a material adverse effect as a consequence of Twitter’s misleading representations regarding the scope of spam on its platform.

The trial between the Tesla founder and Twitter had been set for October 17, 2022. (Sarah Needleman, The Wall Street Journal). Parties to the case on both sides had issued subpoenas for communications regarding the agreement and key parties were set to be deposed in the leadup to the October showdown. Id. But in a move befitting the vacillatory nature of the ordeal, Musk sent a letter to Twitter on October 3, 2022, informing the company that he intended to proceed with the deal on its original terms if Chancellor McCormick stayed the legal proceedings. (Anirban Sen & Tom Hals, Reuters). Chancellor McCormick granted Musk’s request and the parties will have until October 28, 2022, to close the deal. (Cara Lombardo & Alexa Corse, The Wall Street Journal). This postponement is conditional, if the parties cannot close the deal by October 28 a new trial will be scheduled for November of 2022. Id.

Negotiations between the parties have been ongoing since Musk’s reversal, but a new obstacle to closing the deal has arisen. Id. Musk has requested that the deal be contingent upon his receipt of $13 billion in debt financing he previously arranged to help fund the deal. Id. This may not prove to be an easy task. Industry custom for leveraged buyouts indicates that the banks who signed commitment letters to fund Musk’s purchase planned to sell the debt. (Alexander Saeedy, et. al., The Wall Street Journal). But a decline in debt markets since April has put the banks in line to face hundreds of millions in losses if they were to unload the debt to third-party investors. Id.

If this deal is finally consummated, it may not be smooth sailing for a Musk-owned Twitter at the outset. Based upon the original terms of the deal, Musk’s Twitter would see an interest burden increase up to $850 million annually from 2021’s level of $51 million. (Alexander Saeedy, The Wall Street Journal). This would place Twitter’s leverage to nearly nine times its annual adjusted earnings. Id. If history is any indicator, Musk would find a way to overcome such an interest burden; his status as the world’s richest person was not achieved by accident. (Forbes). History also indicates that as this deal between Musk and Twitter unfolds further, it will remain atop the headlines.