Do the rules still apply to Elon Musk? He has successfully overturned much of the accepted wisdom about how a CEO should behave – being charged with securities fraud, getting high with conspiracy theorists and baselessly accusing a member of the public of being a “pedo”, all in the most public way possible. These are not traditionally ways to secure the confidence of investors, but in the era of zero interest rates and quantitative easing, investor confidence was set to maximum by central banks and speculators were taught that volatility paid. The Tesla CEO’s volatile behaviour was a big part of what made him the wealthiest person in the world.
In his battle to buy Twitter (followed almost immediately by his battle to not buy Twitter), Musk may have talked himself into a difficult situation, however. A lawsuit filed against him by the social media platform could cost him a lot more than the $1bn break-up fee specified in the merger agreement. If he ignores the court’s decision, he could even end up in jail.
To briefly sum up the situation: in January this year Musk began buying large amounts of Twitter’s stock, and in March he revealed that he was the social platform’s biggest shareholder. In April he was briefly announced, and then un-announced, as a member of the company’s board, before offering to buy the whole company at $54.20 per share (“420” is a reference to cannabis that Musk thinks is funny). Twitter initially resisted the takeover bid, then agreed to the sale on 25 April. Then, in mid-July, Musk announced he was pulling out of the deal.
Why does Musk want out of a company that has arguably been the secret to his success? One easy answer is that the free money in financial markets has dried up: rising interest rates and quantitative tightening squeezed $8.5trn out of the S&P 500 (an index of big US companies) over the past six months. Between the agreement and the withdrawal, Twitter’s market value has dropped by almost $15bn, and the offer Musk made in April now looks rather generous.
A change in the market is very much not allowed as a reason to breach a merger agreement, however. Instead, Musk is claiming that the number of fake (“bot”) accounts on Twitter constitutes a company material adverse effect (MAE). The merger agreement Musk signed with Twitter defines an MAE as “any change, event, effect or circumstance” which significantly alters the value of the business.
Twitter’s board, meanwhile, has a fiduciary duty to its shareholders to try to secure the price Musk offered. The company is now suing Musk in the Delaware Chancery Court for “specific performance” of his obligations – that is, to force him to go through with the deal.
Christine Chung, a professor at Albany Law School and former enforcement attorney with the Securities and Exchange Commission, says it’s not unusual for buyers to decide that breaching a contract – and paying a penalty – makes financial sense. “That calculus is changed for Musk,” however, because the agreement “contains fairly strong provisions allowing Twitter to demand specific performance – meaning, to get a court order forcing Musk to consummate this deal”.
It also looks difficult for Musk to claim that Twitter’s bot problem – if one exists, which is unproven – constitutes a “change” that he wasn’t aware of before signing the contract to buy Twitter. He has complained about bots on Twitter since 2018. Prior to the agreement, he told his hundred million followers that his bid for Twitter was motivated by the need to “defeat the spam bots”.
This is not unlike seeing a house on fire, writing articles for several national newspapers about how you’d put the fire out if the owners would only sell it to you, securing a mortgage, exchanging contracts, and then saying: “Woah there! I can’t buy this house, it’s on fire!”
Nevertheless, Musk’s lawyers have now issued a subpoena to enlist the Twitter co-founder Jack Dorsey to support his argument. Dorsey is a friend of Musk’s and has backed his bid for the company. He will be called upon to testify that Twitter has misled Musk over the scale of its bot problem.
Musk’s lawyers will argue that he is entitled to quit the deal because he has asked repeatedly for information on how many bots there are, how they’re measured and much else that is relevant to Twitter’s value, and the company hasn’t given him everything he wanted. But Chung points out that Musk doesn’t, as a buyer, get unlimited rights to information. The Twitter board has a duty to the rest of its shareholders, too, a duty that might not have been best served by handing over proprietary information to someone who had repeatedly expressed a desire to set up a direct competitor to Twitter. “It isn’t clear to me that Musk has the right to demand that Twitter hand over everything that he is requesting as a condition of closing, given the language of the parties’ agreement,” she says. “And there’s a question as to whether Musk’s information requests are, at least in part, a strategy on his part to generate grounds for walking away.”
One amusing contradiction in this case is that Musk, like any first-year philosophy student with a bag of weed and a copy of Descartes’ Meditations, is devoted to the idea that the universe is a simulation. This won’t have any bearing on the case, but you could say it’s impish of him to establish a legal position on the authenticity of Twitter’s users when he has strongly expressed doubts about the existence of reality itself.
Another part of the contract that could prove tricky for Musk is the provision that “the Equity Investor [that’s Musk] shall be permitted to issue Tweets about the Merger […] so long as such Tweets do not disparage the Company or any of its Representatives”, which means: “Elon can continue to be awful on Twitter, but not in such a way that sabotages this deal.”
Obviously this is Elon Musk we’re talking about, so out came the memes accusing Twitter of being “all bots”. Twitter, in section 137 of its detailed and furious complaint, says: “The merger agreement provides that if defendants are in material breach of their own obligations under the merger agreement, they cannot exercise any termination right they might otherwise have.” That means: “If Elon crashes Twitter’s stock price with memes, he still has to pay for it.”
Will Musk be forced to pay full whack? Chung says it’s important to recognise that “we don’t yet know the true facts, as demonstrated by adversary proceedings”. There are other components to Musk’s claim, and he can afford more expensive lawyers than anyone else. Twitter seems confident, however. On Wednesday 13 July the company’s lawyers said they expected the trial, which is set to take place in October, to take just four days. “This is a specialised court, and they can move very quickly and efficiently on an expedited timeframe,” says Chung.
The court also has “some teeth”, Chung points out, should it need to enforce a decision on Musk. “You can be held in contempt of court for ignoring a court order, and that can include jail.” Musk’s wealth is made up of stock in companies that are all incorporated in Delaware, and the court might also be able to seize some of those assets. Even for the world’s richest man, “the stakes are quite high”.
It’s likely that a decision by the court will be the beginning of a process of appeal or negotiations for a settlement, but Chung says it will have wider social implications, too. The intense focus on the people and the platform involved could have profound consequences, she says, for the public perception of the rule of law and the observance of norms.
“The Delaware Chancery Court will decide a very narrow question of whether in the context of this merger agreement, Twitter can get an order of specific performance. On one level, it’s a very meat-and-potatoes contract law question. But all these other dimensions to the case, I think, will continue to ripple out… because of who the players are, the nature of the asset at issue, and the consequences for all of us, when we think – do rules really apply to everyone, including the rich and powerful?”