The most-watched commercial dispute in years pits the world’s wealthiest person against one of Silicon Valley’s biggest brand names. This three-part video series goes beyond the headlines about fake accounts and inflammatory tweets to analyze the legal arguments. Elon Musk’s attempt to buy Twitter is unconventional in many ways, but the case offers practical takeaways for any M&A practitioner.
Part 1: What we know so far
Andrew Gray lays out the issues and timelines driving the legal confrontation between Twitter and Elon Musk, and what is at stake with Twitter requesting an order for specific performance—that Musk close the deal.
Andrew Gray (00:05): The acquisition of Twitter by Elon Musk is in jeopardy. And the ups and downs of this atypical transaction saga have caught the attention of the media, investors and mergers and acquisitions practitioners. We're going to discuss what's at stake now that the dispute about the deal is moved to litigation, where Twitter is looking to force the deal to close on its terms. That is, it wants an order requiring specific performance by Musk. The unconventional way this proposed acquisition arose, the speed at which an agreement was consummated, and the almost immediate challenges to the transaction all engage in important questions of securities and corporate law. And after laying out the key parts of the story of this deal coming together and falling apart, we're going to look at the somewhat novel prominence in the dispute of the access to Information Covenant in the M&A contract. The post-signing, pre-closing obligation of a target to share information with the bidder in connection with the consummation of the transaction. Other COVID-era busted deals have principally engaged the material adverse effect concept in relation to closing conditions or compliance with interim operating covenants. This dispute raises some of those points as well, but it is principally about the scope of the access to Information Covenant, Twitter's alleged breach of its obligation and Musk's alleged misuse of it, all in respect of the number of fake Twitter accounts.
Andrew Gray (01:42): Over the period of March to April this year, Musk accumulated a 9.1% stake in Twitter. Whether he made securities law compliant early warning disclosure when he first hit the 5% level is a background issue in the litigation, and is reported to be the subject of securities regulatory inquiries as well. After accumulating a substantial position but before disclosing it, Musk asked for a board seat but then changed his mind and pivoted to a potential acquisition. At another point, Musk said his other plan for Twitter was to build a rival social media platform. A plan that later would put real pressure on the competitive aspects of his post-signing information requests. On April 14th, Musk announced in his SEC filing, and of course via his Twitter account, that he was making a proposal to acquire Twitter for $43 billion. A very significant premium over the pre-announcement market value of Twitter. He put the deal to Twitter on a first and best, take it or leave it basis, and together with the significant premium that indicated a strong desire to get a deal signed. The board of Twitter responded by forming a special committee and adopting a poison pill. A defense that effectively blocked Musk or another bidder from acquiring more than 15% of Twitter shares in a hostile, non-negotiated transaction. Ten days later, on April 25th, the poison pill was dropped and a deal was signed. Twitter, in its filed complaint against Musk describes the merger agreement as very seller-friendly. Including protections for Twitter such as an absence of a due diligence condition, no financing condition, a weak MAE definition and qualified representations. Additionally, the merger agreement contains a fairly typical access to information covenant and protections for Twitter from public disparagement. The purchase price was to be paid in part by Musk in cash through debt, partly secured by Musk's Tesla shares, and Musk also found some post-signing equity investors. Based on the timeline in Twitter's proxy statement and the fact that Musk's final proposal was not subject to the completion of due diligence, it's not clear that, in fact, he did any substantial diligence before entering into the merger agreement. It appears that shortly after signing, Musk had concerns about the deal. According to Twitter, that coincided with the drop in the market, including the price of Tesla shares. Also, according to Twitter, the escape route that Musk pursued was the access to information covenant. An increasingly burdensome requests for data about the number of fake Twitter accounts and the methodologies Twitter uses to estimate that. Musk also made requests for financial information and in reliance on a parallel Twitter obligation to assist Musk in obtaining his debt financing. Twitter's complaint, filed in the court in Delaware, paints a detailed picture of Musk's information requests. But at the time that was going on behind the scenes, observers saw some back and forth in public on this issue. With Musk now infamously posting a vulgar emoji in response to a Twitter post by its CEO about the fake accounts issue, and commenting in public on Twitter and elsewhere that he was having second thoughts about completing the deal and speculating about his rights to walk away. Twitter itself has said that it consistently remained committed to the transaction. This all culminated in Musk's report purporting to terminate the transaction on July 8th in a letter to Twitter filed with SCC.
Andrew Gray (05:36): The dispute highlights the way that different parts of an M&A contract agreement work together to allocate post-signing, pre-closing risk and the way that contractual obligations imposed on the target and bidder reflect that risk allocation. Unlike other COVID-busted deal cases, this one highlights the access to information covenant. Musk hasn't answered Twitter's complaint, but his July 8th SEC filing previews his defense. He said in that letter, principally, that Twitter breached its access to Information Covenant by failing to provide the fake account data requested, and that Musk was entitled to all the data he requested because it was, quote, related to the consummation of the transaction and contemplated by the agreement. That is, Twitter was obliged to provide access to the requested information. Musk said this alleged breach of the access to information covenant excuses him from having to complete the deal. And he also says, also in relation to the fake account data, that Twitter's continuous disclosure filings misrepresent the scale of Twitter's fake user problem, and that this may result in a mere material adverse effect. A further excuse from performing if that is made out. in the complaint it filed, Twitter anticipates these defenses. Apart from the factual question of whether Twitter satisfied Musk's fake account information requests, there's a real legal question of whether the access to Information Covenant is supposed to work in the way Musk alleges. Effectively providing post-signing, pre-closing due diligence in circumstances where the M&A contract itself doesn't have a due diligence condition. How does the interaction of the Information Access Covenant and the lack of a due diligence condition reflect risk allocation between Musk and Twitter? As to the misrepresentation point in the MAE, Twitter says that its representation about the accuracy of its public filings, including fake account disclosure, is qualified such that provides no exit route Musk, reflecting the view that Musk took the risk about the company's disclosure on the fake account issue.Twitter also says that Musk himself had breached the agreement, including the non-disparagement obligation. And this disentitles Musk from terminating the transaction. Twitter wants to force Musk to close, and it relies on what it calls a seller-friendly provision in the merger agreement, providing for a specific performance. There's therefore a question about the way that remedial risk was allocated. And Josh and Gillian are going to discuss the contested access covenant in this transaction, and the legal framework for remedying a busted M&A deal.
Part 2: The outer limits of access to information covenants
The case revolves around the access to information provision and how broadly to interpret it. Josh Lavine explains why the Twitter-Musk case is bringing more attention than usual to access to information provisions—and offers takeaways for M&A practitioners.
Josh Lavine (00:05): I'm going to provide an overview of the access to information covenant typically found in M&A agreements, the specific dispute that has arisen on the Twitter transaction, and some immediate takeaways for M&A practitioners and access to information clause is a very standard provision in acquisition agreements. As Andrew explained, it provides a target company during the period after the purchase agreement has been signed and before the transaction is closed, the opportunity to request additional information about the company or its business. It's not a provision that tends to be at the top of the list in terms of the most contentious or heavily-negotiated, and that's because it's generally understood that a buyer often has more work to do after entering into the purchase agreement that may require additional information. For example, the purchaser may need to make additional efforts to secure financing, the buyer may need to prepare for closing and any required filings or disclosure obligations that the buyer may have, and there may be integration planning required for once the transaction is completed. But it's also customary for there to be limits on the information a buyer may request. For example, information requests typically need to be reasonable and must comply with law and any confidentiality obligations that the target may have, and cannot unreasonably interfere with the operation of the target's business. In the Twitter merger agreement, Twitter agreed to provide additional information concerning Twitter and its business "as reasonably requested by Mr. Musk for any reasonable business purpose related to the consummation of the transaction". The question at the heart of this dispute is the intended scope of this access right. More specifically, if the phrase "related to the consummation of the transaction" should be interpreted narrowly, or as Twitter has described it in a letter to Mr. Musk's counsel, for the "very specific purpose of facilitating the closing of the transaction". Or if, as Mr. Musk may prefer, the access rights should be interpreted broadly to allow Mr. Musk to conduct due diligence in order to investigate an alleged or suspected breach of representation. In a response from Mr. Musk's attorneys to Twitter, it was noted that Mr. Musk specifically negotiated this access right precisely so that he could conduct due diligence after the agreement was signed. We expect most target companies would be uncomfortable with such a broad interpretation of this access right for a couple reasons. First, due diligence is conducted generally before a binding agreement is entered into and announced, not after. And the Twitter merger agreement did not contain a due diligence closing condition. The access covenant is not generally thought of as giving the buyer an opportunity for a "second kick at the can", so to speak at due diligence. And second, and perhaps most importantly, the target will not want to put itself in a position where it is required to provide potentially endless information to a buyer who may in fact be searching for a reason to terminate the acquisition agreement, and particularly a buyer such as Mr. Musk, who as Andrew noted, suggested that he may wish to build a rival social media platform. Here in Canada, this issue was recently considered by the Ontario Superior Court of Justice, in its Fairstone Financial/Duo Bank decision. In that case, the purchaser submitted numerous information requests to the target, many of which were submitted after the purchaser alleged a breach of the purchase agreement. And the court in Duo found that many of these requests were not legitimate requests for information and were not required to close the transaction. It will be interesting to see how the Delaware Court addresses this key issue between Twitter and Mr. Musk. But in the meantime, I think the key takeaways for M&A practitioners is to pay careful attention to the drafting of the access covenant, and more specifically, avoid open-ended covenants that grant a right to "all information requested" or "all information reasonably requested" without also specifying the purpose for which information may be requested. And when setting out the purpose, consider addressing head on if the purchaser may request information for purposes of verifying any representations and warranties in the purchase agreement, and if the target is required to provide information if the purchaser is in breach of the purchaser agreement, or if the target has a reasonable basis to believe that the purchaser no longer wishes to proceed with closing. And so the question for now is where is the Twitter case likely to go from here?
Part 3: What happens next?
Gillian Dingle explores the possible legal outcomes available to the Delaware court deciding the case. Will the Court allow Musk to walk away from the deal? Will he be required to close the deal and buy Twitter? What would happen if Twitter changes its position and seeks damages?
Gillian Dingle (00:05): Twitter has already commenced its claim in Delaware and it is seeking specific performance. It has pleaded, as Andrew noted, that Musk is in breach of various provisions of the merger agreement. And while Twitter denies that it has breached any provision of the agreement that would entitle Musk to terminate, the agreement does provide that a party who is himself in breach can't exercise any termination rights.
Gillian Dingle (00:41): Twitter pleads that it has satisfied all of its obligations, and subject to one remaining regulatory approval, it is ready to proceed to its stockholder vote and close the transaction. So what it's asking the court to do is to order that Musk specifically perform his obligations, that he be required by the court to close the deal and buy Twitter as he agreed to do. And the merger agreement, as many do, provides expressly for specific performance. The parties have agreed here that damages would be an insufficient remedy. This is standard language in these sorts of agreements, and it's inserted because specific performance can be seen as an extreme remedy. It forces an unwilling party to meet his contractual obligations, and courts in both Canada and the United States will only grant specific performance where damages are insufficient. Musk hasn't yet responded with his defense to the complaint but we expect that, as Josh noted, his response is likely to be that because of what he describes as the several breaches by Twitter of the merger agreement, that he doesn't have to close. One of the standard closing conditions that we see in this agreement is that Twitter must have complied in all material respects with obligations under the agreement. And Musk's position, and his answer to the complaint is likely to be that by failing to give him the information he has sought about the number of bot accounts on the platform, which Musk views as fundamental to Twitter's business, Twitter has failed to meet its obligation to grant access, and this failure is material. So what can the court do with this set of facts? One potential outcome, the outcome that Musk hopes for, is that the court agrees with Mr. Musk that Twitter breached its obligations. He would then be entitled to walk away from the deal, and both sides' obligations would be at an end. The court may also agree with Twitter that either it has not breached any of its obligations and so Musk can't terminate the agreement, or even if it has, that Musk has also breached obligations and so is unable to use any of his termination rights. And as I noted, Twitter is asking the court to order specific performance. In either case, assuming all other conditions are met. Musk will be required to close the deal and buy Twitter at a price that is now substantially in excess of Twitter's current stock price. This may be challenging, and the parties have agreed that it's a condition of the availability of specific performance that Musk's debt financing has been or will be funded. The third option is one that isn't yet on the table and may never be on the table, depending on how the case unfolds. If Musk succeeds, at least based on the facts at present, there is no damages. There is no break fee, he walks away. Twitter may change its position in the litigation and seek damages instead of specific performance. This is something that it hasn't currently asked the court to grant. If it makes that decision, the stakes may be high. The merger agreement contains the standard "no third-party beneficiary" language that we see in many agreements like this. And that means that outside of certain limited circumstances described in the agreement, the agreement itself does not confer any rights on third parties. This language is intended to prevent non-parties, such as stockholders, from suing on the agreement to be paid their $54 a share, and leading to a damages award for breach of contract that represents the difference between the Twitter share price and what Musk would have paid, in this case in the tens of billions. Courts in New York, and most recently in the Cineplex decision here in Ontario, have held that this type of third-party beneficiary language limits the available damages to those that have been suffered by the target only, not the target's shareholders. However, courts in Delaware, where the case will be tried, have been critical of this interpretation, with one of the former vice chancellors remarking at a conference that an award of the shareholder premium reflects a logical and practical understanding by parties to merger agreements, and that the standard third-party beneficiary language should not be read to restrict damages. But there are also a lot of practical challenges with pursuing damages on behalf of third-party shareholder should Twitter decide to do that here. Which specific shareholders are to benefit? Is it the shareholders as they existed before the merger agreement was signed? Is it the shareholders as they exist at the time the case is decided? But even if Twitter chooses to seek damages instead of specific performance, the Delaware Court may not have to address whether the third-party beneficiary clause actually limits Twitter's ability to receive the shareholder premium. And this is so because the merger agreement in this case expressly contemplates that Twitter can seek damages for termination, and then in the case of liabilities or damages payable by Musk for a knowing and intentional breach, that these damages would include the benefits of the transaction contemplated by this agreement lost by the company's stockholders, so the shareholder premium. Lawyers will be working frantically to get the case ready for court so that the court can determine all of the issues that each side has raised.
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