Musk Balks​

By Jake Rickman​

What do you need to know this week?

In what may or may not come as a surprise (depending on your perspective), according to a letter filed with the Securities Exchange Commission by Skadden, Elon Musk has announced he is terminating his acquisition of Twitter.

Mike Ringler, an M&A partner with Skadden representing Musk, claimed that Twitter was in “material breach” of the purchase agreement and may have made “false and misleading representations” that Musk relied upon when entering the agreement. Additionally, Musk alleges that Twitter has refused to comply with its obligations under the agreement to supply information related to the number of “fake or spam” accounts. Therefore, as the letter states, this entitles Musk to terminate the purchase agreement.

But the real question is: does Musk have any real right to withdraw from the purchase?

Why is this important for your interviews?

The saga that has been this circus of an attempted acquisition keeps on giving. If you are interested in corporate law, interviewers will want to see if you have developed a perspective on this deal. Ideally, your perspective will show an understanding of the inner workings of an M&A deal.

As far as Musk’s legal argument, he relies on four interrelated claims:

  • Twitter refuses to provide certain information to Musk;
  • Twitter has breached a material term of the agreement;
  • Twitter made false representations; and
  • the cumulative effect of this is that this constitutes a “material adverse effect” (MAE).
  • The problem with these claims is that they may not have much legal weight.

In most expensive M&A deals, the buyer (Musk) would sign a confidentiality agreement in exchange for gaining access to the inner workings of the seller’s business (Twitter). But here, unusually, Musk waived any substantial due diligence when he signed the binding purchase agreement. He therefore has much less leverage to allege that he has not been given the information requested after the fact.

Likewise, Musk alleges (without evidence) that Twitter has been systematically downplaying the number of bots on its site. If so, this may amount to a misrepresentation. However, Twitter has long acknowledged that around 5% of all users are bots, which weakens Musk’s misrepresentation claim.

But even if one or more of these claims can be made out, the purchase agreement requires that the breach of contract or misrepresentation result in a material adverse effect, which is a term that refers to some event that radically disrupts the seller’s business. While Twitter’s share price has fallen, there is no evidence suggesting that its underlying business model has been affected in any substantial way. That is, there is no evidence of an MAE.

How is this topic relevant to law firms?

Twitter has promised to sue Musk to force him to close the deal. Whether or not the Delaware Chancery Court will order Musk to complete the deal or simply require that he pay the $1bn exit fee remains to be seen.

Wachtell, Lipton, Rosen & Katz is representing Twitter.