Twitter v Musk will go to trial in October

Many wonder who will win the Twitter v Musk legal battle as the trial is set to begin next month. Twitter and Musk are headed for the Delaware Court of Chancery for a five-day trial from October 17th to October 21st. The case is heard before Delaware Chancellor Kathleen McCormick. On the last court date, both sides took a mix of wins and losses. But Twitter seems to have considerably a stronger case owing to a combination of evidentiary facts in its favor. One, Musk did not do due diligence and he waived financial contingency. Most importantly, Musk was aware of the spambot problem which is at the heart of the legal battle well before he offered to buy Twitter. Since Twitter and Musk entered into a binding agreement last April, many started to speculate what the outcome of this impulsive $44 billion buyout could be. To many, the deal seemed too vague and unfeasible, and it was a deal that was never going to happen. Twitter and Musk show has been going on for months, featuring giant peripheral figures such as Goldman Sachs and J.P. Morgan who did not want to miss the opportunity to stay in the good graces of the tech mogul. And there are no sympathetic figures in this corporate warfare, even every spectator watching the Twitter Musk ordeal wants to take a bite (Tesla shareholders eyeing to up their share values in the event Musk wins, whereas in the event Musk wins Twitter shareholders wanting to grab the premium share price Musk has earlier promised).

The pleadings in Musk v Twitter run through a few hundred pages and to be honest it is a good yarn for the reader. So we wouldn’t really recommend them as a worth read. Just too many details to digest. And there have also been lots of legal analyses and commentaries written on the multi-billion dollar litigation. Here’s detailed a guide for everyone curious about the Twitter v Musk battle and what to expect in the aftermath of the trial. Strap in for a long ride.

On the 14th of April 2022, Musk offered to buy Twitter for $54.20 a share. On 25th April, he went out of his way to sign a seller-friendly merger agreement through his solely owned parent and acquisition subsidiary X Holdings I, Inc.(the parent company) and X Holdings II, Inc.(the Acquisition subsidiary), making an unsolicited offer to buy Twitter for a total of $44 billion. The agreement was not subject to financial contingency or diligence. But less than three months after they struck the deal, Musk wanted to simply walk away from the deal. Twitter claims that Musk’s exit is influenced by the market decline and plunge in Tesla stock after the deal was announced. A significant portion of the financing commitments initially came from securing marginal loans against Tesla stocks worth around $12.5 billion. After the merger agreement was signed, U.S. stock market took a turn for worse. Tesla suffered a 35% drop in its share price. Musk also changed course and dropped the idea of using Tesla shares to secure marginal loans.

The first shot in this fiery court battle was fired by Musk’s legal team when termination of the deal was announced in a July 9 regulatory filing with SEC. Musk’s lawyers sent a string of notices of termination to Twitter citing various grounds; a large number of bots on the platform and a multimillion-dollar severance payment to Zatko without Musk’s consent notable among these grounds. Musk said he cannot move forward because Twitter was in material breach of its contractual obligations under the agreement and misrepresented facts about spam accounts on the social media platform. The merger agreement and Twitter’s filing to SEC show the number of spam accounts is less than 5% of mDAWU (Monetizable Daily Active Users), however, Musk believes Twitter lied to SEC and that number is beyond 5%. By failing to give accurate numbers, Musk says, Twitter breached his right to information under information-sharing and cooperation covenants in the merger agreement. Recent revelations about bots by Zatko will spiff up Musk’s case that Twitter misled him about the percentage of bots on the platform. Zatko has disclosed that Twitter in its filings to SEC hid the true status of its spambots measurement procedures and gave a false narrative on the percentage of bots and spam accounts on its platform. Musk says these inaccurate representations are reasonably likely to result in a Company Material Adverse Effect (MAE) and the sacking of Twitter employees without Musk’s consent has resulted in a breach of the ordinary course covenant. MAE is a concept that encompasses broad circumstances and events whose adverse consequences make the performance or consummation of a transaction or contract untenable.  However, Twitter’s legal team could slim the chances Musk may have over the bot argument by bringing in evidence to show that defeating bots on the platform was pretty much part of Musk's plan to buy Twitter.

 

On July 12th Twitter filed a lawsuit against Elon Musk, X Holdings I, Inc.(the parent company), and X Holdings II, Inc.(the Acquisition subsidiary) alleging that the defendants have failed to honor the contractual obligations under the merger agreement. Twitter claims that Musk wants to walk away as the deal is no longer favorable to him. The action by Twitter is for specific performance, brought to enjoin Musk from further contractual breaches and to compel him to consummate the merger agreement by satisfying a few outstanding conditions. Specific performance is an equitable remedy in contract law whereby a court orders a party to perform a certain action such as to complete the performance of a contractual agreement.

On September 22nd Chancellor Kathleen McCormick handed down a win on Musk, letting him amend his claims by incorporating Twitter’s former security chief Pieter Zatko’s whistleblower claims in his lawsuit. But the judge turned down a request by Musk’s team to reschedule the trial. Musk wanted more time for the discovery of Zatko-related information and attempted to push back the trial to February 2023. McCormick was heard to say “I am convinced that even four weeks’ delay would risk further harm to Twitter too great to justify.” McCormick seems to be right about fast-tracking the trial as the brain drain happening inside the company is becoming evident with many top-level executives getting sucked. Among the top execs fired from Twitter are its consumer product leader Kayvon Beykpour and Bruce Falck. Despite the increase in the number of Twitter users, the company is feeling the Musk effect with employees being fired and a plunge in its revenue.

Where to from here? There is no sign of a settlement between parties before the trial date. And the trial is just two weeks away. The fate of the social media company will be determined by the outcome of the trial. Normally, a breach of contract is remedied by specific performance or payment of damages. Specific performance is ordered when damages are inadequate. Clearly, in the case of Twitter damages are inadequate. So an order of specific performance in Twitter’s favor could force Musk to close on the deal which could have an adverse effect on the Tesla stock. The odds are against Musk and Twitter certainly has the upper hand.

 

Chancellor MacCormick has previously awarded specific performance in a much similar case Snow Phipps Grp. LLC v KCAKE Acquisition Inc in 2021. The attitude of the Delaware courts has been an emphatic rejection of buyers’ remorse. Any buyer who does not exercise due diligence by rushing into deals and later finds himself unable to bear financial costs is generally set to lose in a specific performance lawsuit. Twitter’s lawsuit against Musk is one in equity which gives the Delaware Court of Chancery a discretionary power to balance the equities. Under Delaware law, a party seeking specific performance must only show three grounds; that a valid contract exists, that the complainant is ready and willing to perform the contract, and that a balance of equities is in the complainant’s favor. Chancellor McCormick’s decision to expedite the trial itself is a clear indication that equities are tipping in favor of Twitter. As a precaution to avoid a possible emergency sale of Tesla stocks, Musk recently sold a huge batch of his Tesla shares to finance the deal in the event a final decision favorable to Twitter comes down. If Musk wins the lawsuit he will escape with no more than $1 billion as specified in the agreement. An order in Musk’s favor will see Tesla shares going up and Twitter share value sinking further. If Musk loses, Musk will have to honor the financing commitments to consummate the transaction and he will become the sole owner of the social media platform. And Twitter will no longer be a listed company and it will become a private shareholder company. However, enforcing a specific performance order against Musk will remain a challenge considering Musk’s tendency to flout legal confines.