Twitter bluebird the lawyers' golden goose

Company News

by Glenn Dyer

The Twitter takeover imbroglio is going to be a lawyers benefit unless Elon Musk and the company strike some sort of quick settlement.

However, that doesn’t look like happening so the situation has all the hallmarks of being a big earner for US law firms while Musk and Twitter will end up poorer.

The only way to describe the mess at Twitter after Tesla CEO Elon Musk bolted late Friday is “lawyers at 20 paces and in massed battalions”.

Musk’s official withdrawal was revealed in a Securities and Exchange Commission (SEC) filing after trading ended Friday. That saw Twitter shares drop a further 7% at one stage before they ended down more than 4% at $US34.91, nearly $US20 a share under the offer price.

Musk is claiming he’s been misled on spam accounts by Twitter while the Twitter board and chair say they intended to force Musk to honour the $US54.20 a share offer or make sure Musk coughs up with the $US1 billion break fee if he doesn’t.

A Washington Post story on Thursday night, US time, that Musk was leaning towards dropping the bid turned out to be spot on, as experienced analysts thought it would be.

Twitter shares fell 5% in the wake of the story in regular trading Friday but Tesla shares were up 1.5%.

Bret Taylor, chairman of the Twitter board of directors, wrote after the Musk withdrawal was made public that his company is “committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plans to pursue legal action to enforce the merger agreement. We are confident we will prevail in the Delaware Court of Chancery.”

“I think Twitter, probably, it’s going to be in freefall, 25 to 30 dollars we may guesstimate based on Monday where it opens. Going to be a lot of pressure because now it’s really the Musk bid that was keeping it where it is,” an American analyst told Reuters.

“I think it’s been a black eye for Musk, the way that he’s handled this. It’s been just a soap opera from the beginning, since April. It always really was something that really never made sense to investors, why he was going to go after Twitter at $44 billion.”

A letter sent by a lawyer on behalf of Musk to the Twitter’s chief legal officer and revealed in the SEC filing.

In the letter, disclosed in a Securities and Exchange Commission filing, Skadden Arps attorney Mike Ringler charged that “Twitter has not complied with its contractual obligations.”

Ringler claimed that Twitter did not provide Musk with relevant business information he requested, as Ringler said the contract would require. Musk has previously said he wanted to assess Twitter’s claims that about 5% of its monetizable daily active users (mDAUs) are spam accounts.

“Twitter has failed or refused to provide this information,” Ringler claimed. “Sometimes Twitter has ignored Mr. Musk’s requests, sometimes it has rejected them for reasons that appear to be unjustified, and sometimes it has claimed to comply while giving Mr. Musk incomplete or unusable information.”

He also claimed Twitter breached its obligations under the agreement to get Musk’s consent before changing its ordinary course of business, pointing to recent layoffs at the company.

Musk’s flirtation with buying Twitter appeared to start in late March. That’s when Twitter has said he contacted members of its board — including co-founder Jack Dorsey — and told them he was buying up shares of the company and interested in either joining the board, taking Twitter private or starting a competitor.

Then, on April 4, he revealed in a regulatory filing that he had become the company’s largest shareholder after acquiring a 9% stake worth about $US3 billion.

But contrary to his disclosures, it was later revealed by another SEC filing that he had started buying shares in late January and had built a stake without disclosing that fact in accordance with US market regulations.

At first, Twitter offered Musk a seat on its board. But six days later, Twitter CEO Parag Agrawal tweeted that Musk will not be joining the board after all. His bid to buy the company came together quickly after that.

Musk sold around $US8.5 billion worth of shares in Tesla to help fund the purchase, then strengthened his commitments of more than $US7 billion from a diverse group of investors including Oracle co-founder and Donald Trump supporter, Larry Ellison.

“This is a disaster scenario for Twitter,” said Wedbush analyst Dan Ives. “Now the company will battle Musk in an elongated court battle to recoup the deal and/or the breakup fee of $1 billion at a minimum.” He predicted Twitter stock will likely trade in the $25-$30 range when it opens Monday.

“This soap opera has seen many twists and turns and now ultimately Twitter goes back to the drawing board,” he said. “This was always a head scratcher to go after Twitter at a $44 billion price tag for Musk and never made much sense to the Street, now it ends (for now) in a Twilight Zone ending with Twitter’s Board back against the wall and many on the Street scratching their head around what is next.”

Ann Lipton, a professor of corporate governance at Tulane Law School told CNBC that the Twitter board is in a difficult situation and it can’t just go off an do a deal with Musk by cutting the price or doing a deal on the break fee of $US1 billion. Twitter shareholders are suing Twitter and Musk.

She told CNBC that merger agreements are “very hard to get out of,” and so far, Musk appears to have provided insufficient evidence backing up his claims that Twitter lied about its spam figures.

In order for there to be a “material breach” of the deal agreement, Musk would have to prove that Twitter made false statements that were so egregious they’d have a long-term impact on the company’s earnings potential, Lipton told CNBC.

“He has yet to put forth evidence that that is in fact the case,” she added.

Twitter appears to have the upper hand as the deal drama heads to court, Lipton said. The merger agreement includes a “specific performance clause,” which says Twitter has the right to sue Musk to force him to go through with the deal, as long as he still has the debt financing in place.

But Musk has a history of ignoring officialdom and the doing the right thing, so the Twitter situation could end up anywhere.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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