Can Elon get out of $TWTR? Some follow Ups
In this post, I’m just going to go bullet point through some questions and ideas that are lingering / that I didn’t address in the initial post (note that my friend Lionel also did a follow up post to our podcast to address some other lingering questions!).
The questions / ideas I covered:
Occam’s razor suggests Elon closes at the end of the month. It’s probably rational for him to close as well.
Why did the Chancellor grant the stay?
Twitter isn’t taking a deal / price cut now:
Spiro’s “Twitter offered billions off but Musk refused” quote
Timing of trial:
October 28th close date, Twitter’s earnings, and the Tesla earnings blackout window:
A little more on TWTR’s near term earnings:
Without the suit, Elon would have closed in September. If Twitter can prove it wasn’t insolvent / financing was available then, does TWTR instantly win?
Why would Elon not sit for a deposition?
Can Elon even claim a solvency out?
Decopac issues and appeal chances
Burnt hair and best efforts on financing
On to the questions / ideas!
Occam’s razor suggests Elon closes at the end of the month. It’s probably rational for him to close as well. Two bold arguments; let’s break them down.
First, Occam’s razor. Elon made a filing last week that said he planned on closing the Twitter deal by October 28. What makes more sense: that Elon plans on doing what he and his lawyers put into a court filing, or that he’s running an elaborate scheme to get out of the most widely watched merger contract filing in history? I know it’s Elon, but…. I’m going to say the simplest explanation is most likely here.
It’s rational for Elon to close. Look, Elon is going to take a bath on buying Twitter. The buyout values Twitter at ~$44B, and it’s probably worth ~half that. That’s a massive loss, and continuing to fight Twitter in court to get out of the deal only incurs a few extra million (or tens of millions, depending on how long you fight) in legal fees. Given that math, isn’t it worth continuing to burn a few million in legal fees hoping to get lucky if Elon has even a 1% chance of getting out of overpaying by $20B?
The answer is actually no (it is not worth continuing to fight) at this point! Why? Well, Elon just put in a court filing that he’s ready to close Twitter on terms by the end of the month. If he closes now, he will get ~$13B of debt funding as well as ~$7B of equity coinvests he raised before he started making MAE claims and everything. Closing here and now lets him close with his debt and equity co-investors still (largely) in place. If he choses to pursue a (very) longshot financing or insolvency out, Elon will almost certainly lose. When he losses, not only will he have incurred tens of millions in additional legal fees (and remember, he’ll need to pay both his own legal fees and Twitter’s legal fees given he now owns Twitter), but he’ll also have to pay roughly a billion dollars in pre and post-judgement interest (or more, if this drags on longer). And he will have created very fertile grounds for his equity co-invest and his banks to walk away. Imagine he tries an insolvency out at the end of October, and a judge then orders him to close because he has constantly breached the merger agreement. Elon has just given his banks / co-invests a free pass to walk. “Hey Elon, you said Twitter isn’t worth the value of the debt, and the judge made you close because you broke the merger agreement constantly. We’re out!”.
So if Elon closes during the current stay, yes he way overpays for Twitter, but almost half of that payment is coming from someone else (banks and co-investors). If Elon pursues any shenanigans, he will almost certainly lose, the deal price will continue to tick up thanks to pre-judgement interest, and he’ll have to fund all of it himself. That’s a mammoth, mammoth increase in cost…. and the overhang might weigh even further on Tesla’s shares as the market factors in Elon needing to sell another $20B+ of stock to fund the Twitter deal, which would make it even more expensive for Elon to keep fighting…
A little more on how financing outs could hurt Elon: if he tries to walk on financing, Twitter can compel Elon to sue the banks to force them to fund. That could create some strange outcomes; as one expert put it, Elon would have some wonky incentives in a suit that he’s compelled to do (“he has an incentive to lose if he litigates against the banks because then that becomes a crutch for him to argue, it's like a lever for him to try to argue against getting this deal done.”). So the Chancellor might just rule to Elon, “you go ahead and you close this deal. And then if you want to sue the banks, you go ahead and you do that, but you take your time. It's no longer going to be the shareholders of Twitter's problem or the judges in Delaware's problem.” If that happens, Elon would have to close the Twitter deal with all equity / his own money, leaving him ~$13B deeper in the hole (and that’s assuming only the banks walk!).
Why did the Chancellor grant the stay? A lot of people have asked, “If Elon has shown such bad faith, and TWTR opposed the stay, why did the Chancellor give it to him?” There are a few different answers / angles here (including that the judge may might be playing 3-D chess), but the simplest is that giving him a stay was the best move for the Chancellor. It encourages Elon to close on terms without needing a court case, and if Elon doesn’t close it cuts off a lot of potential for future shenanigans (i.e. a scenario where a court rules against Elon and Elon then claims a financing out) as well as gives the court extra “bad faith” arguments against Elon if the court wants to use them.
Per an expert,
if she can avoid a trial, she'll avoid a trial. And if it's at all possible for the parties to actually close this deal before October 28, as he says he wants to, she's very happy for that to happen, right? So if she doesn't have to get into this, she doesn't want to, right? Notwithstanding the fact that Twitter obviously doesn't trust Musk, but she is willing to take him at face value just to not have the court wrapped up in this thing. If that is how it turns out will be the cleanest, best result for everybody if they just settle this thing.
Because she doesn't necessarily want to have to go and order specific performance orders, there's going to be appeal and all the rest of it. So if she can get out of it with them doing this thing, notwithstanding the fact that Twitter objected because they want to keep the heavy hand of the law as close to Elon's neck as possible, she'd be happy with that result
Twitter isn’t taking a deal / price cut now: Lots of people think there’s a chance that if Elon doesn’t close at the end of this month, Twitter will take a small price cut from him in return for deal certainty / closing. I think the odds of that are zero. Note that I did not say the odds of renegotiation round to zero. I said they are zero. The time for deal cuts / negotiations has passed; at this point, Twitter is either getting $54.20/share from Elon (perhaps plus prejudgment interest if ordered to close by the court!) or Elon is going to find a way to wiggle out of the merger agreement. There will be no price cut.
Why won’t Twitter renegotiate? There are lots of reasons (they’d need to go back to shareholders, the board could expose themselves to some legal risk, it would be faster to close through a court ordered process than a price cut given the need for a shareholder vote, etc.), but the main reason is that they’d effectively be negotiating against themselves! If Elon doesn’t close on October 28, Elon will have proven that he does not care about any legal promises / pieces of paper, and he will weaponize anything and everything he can in order to get his way. If he doesn’t close October 28, the only way Twitter will ever get him to close is through a court order. Renegotiating just gives away money that Twitter didn’t need to give away, and it gives Elon extra time to hope for some wiggle room on his merger as a renegotiation would require a new shareholder vote and then a whole new trial if and when Elon didn’t close on the new deal.
Spiro’s “Twitter offered billions off but Musk refused” quote
Speaking of price cuts, Elon’s lawyer, Alex Spiro, put out a statement that said, “Twitter offered Mr. Musk billions off the transaction price” but Musk “refused because Twitter attempted to put certain self-serving conditions on the deal.”
That statement has raised a lot of eyebrows in the arb community; if Elon was really planning on closing the deal, why wouldn’t he take a deal cut? Was Twitter’s “self serving conditions” Elon dropping financing / insolvency conditions, and Elon not taking them a sign that he plans on pursuing a financing / insolvency out?
It’s entirely possible…. but I actually read a few things as more likely.
I think it’s more likely Spiro makes those claims on the belief that Elon is going to close, because if Elon doesn’t close Twitter is going to be filing Spiro’s statement with the court very quickly and saying, “Hey judge, look at this! Elon’s lawyer was referring to conditions Elon would use to break this deal at the same time he was repping to the court he would close the deal and using that to get you to stay the trial. Bad faith much?” So I think it’s more likely Spiro is making those claims to try to “win” the media narrative a bit while team Elon is planning to close on terms.
I’d also note that Spiro made that statement in public, not in court. Again, team Musk could be looking to “win” some media narrative. Spiro could be referring to a months old settlement offer from Twitter. Or he could be flat lying. But I struggle to believe he’s making that statement in public if Elon is secretly plotting to use the very conditions Spiro is referring to to break the deal.
Loose lips might sink ships, but they definitely mean death in Delaware courts.
The third option: there has been some reporting that Elon still plans to sue Twitter’s board / executives for different fraud / reps and warranties claims. Perhaps the terms Twitter wanted him to agree to were self-serving for the board (“Hey Elon, here’s a billion off if absolve the board of personal liability!”). I’m skeptical for a host of reasons, but I could see some angles to this one.
Timing of trial: lots of questions on when a trial would start if Musk doesn’t close. Chancellor McCormick has been pretty clear she’s concerned about speed here (“the longer the merger transaction remains in limbo, the larger the cloud of uncertainty cast over the company”), so I think she’ll look to go fast. My understanding is CM has another Elon related trial the week of November 14th, so that could make the timing of a new TWTR trial a little funky.
Particularly right when the stay got issued in early October, several people suggested to me that the Chancellor would look to have a fast trial sometime the week of November 7 if Elon didn’t close, and that the trial could get shortened to a day or two because the arguments would simply focus on financing / insolvency at this point. This super tight time frame would make some sense; Elon filed his stay motion the week of October 4 for a trial set to start week of October 17, so doing a trial week of November 7 when the deal “broke” again on the week of October 24 would basically put the trial back on the same timing as before the pause.
However, I’ve come around to the view that most experts shared with me: that timing is almost certainly too aggressive, particularly given that a trial would now incorporate lots of new arguments around financing and insolvency. New arguments means new discovery (depositions asking questions like “Did you tank your own financing?” or “how and when did you come to believe Twitter was insolvent” along with lots of looking at Elon’s communications with his bankers). Given all of that, I think we’d probably be looking at a trial right after Thanksgiving. CM has done quick decisions before, but it'll probably take a week or two to get her ruling out. So we probably get a trial right after Thanksgiving, with a decision before the end of the year, and any potential appeal will be resolved within a month or two (this basically aligns with the timeline Lionel laid out).
While the Chancellor is clearly concerned with speed / the harm being done to Twitter through deal uncertainty, she is not going to rush the process to the point where it’s not done correctly. There are a bunch of reasons for this, but one that has to linger is a rushed or improper process increases the risk of getting overturned on appeal, and the Chancellor isn’t going to risk that.
On appeals timing: Akorn is the only MAE case Delaware has ever ruled against the seller (at least that I’m aware of!). Akorn lost their case October 1, appealed October 18, and the Delaware Supreme Court confirmed decision December 7. So roughly two months there.
October 28th close date, Twitter’s earnings, and the Tesla earnings blackout window: There are lots of conspiracy theories around why Elon proposed October 28th to close on the Twitter deal. As Twitter pointed out in opposing Elon’s stay motion: if Elon was serious about closing he could do so quickly given the deal should have closed in September (there is a bank marketing period, but the bank’s could just waive it given they’ll likely need to eat the debt anyway).
Some people have suggested Twitter would generally report earnings October 26, so Elon could have chosen October 28 to look at Twitter’s Q3 earnings and then use that to aid in a financing / insolvency out. I’m very skeptical of that theory for two reasons:
Twitter does not have to report earnings then; they have not scheduled them, and there’s nothing that says they have to report earnings before deal close. They could just tell Elon “close on time; we’re well within the SEC reporting window for big companies.”
There’s nothing magical about a public earnings release. Elon and the lenders will certainly see Twitter’s Q3 numbers well before a public release; I’d be shocked if they haven’t seen them already!
The conspiracy theory I’ve come around to: Elon needs to sell a bunch of Tesla stock to fund the remaining equity portion of TWTR. However, Elon’s currently in a blackout window where he can’t sell TSLA shares. Tesla is scheduled to report earnings this week (after market Weds, October 19); once that report happens, the blackout window lifts and Elon will have ~a week to sell TSLA stock before needing to close the TWTR deal.
A little more on TWTR’s near term earnings: make no mistake, TWTR’s near term earning are likely to be awful. Digital brand advertising revenue (which is the bulk of TWTR’s revenue) tends to be the first thing on the chopping block when times get tough. It’s not just TWTR that suffers from this chopping; check out SNAP’s results / share price (or any tech / media company that relies on advertising!). But it’s even worse for Twitter because the merger is causing massive turmoil in the organization, Elon’s barrage has advertisers questioning the value of Twitter’s ads, and Twitter is incurring huge legal costs to fight Elon in court. Lots of investors have asked: will Q3 results be bad enough to cause a MAE for TWTR or back up an insolvency claim from Elon?
The answer: almost certainly not.
On the insolvency angle, remember that Elon said Twitter needs to go private in order to make the changes necessary to thrive. He also said he didn’t care about the economics of Twitter when taking it private. Neither of those statements jive with a lending plan based on near term results being blockbusters! In fact, they rely on near term results being intentionally awful to transform Twitter’s business!
On the MAE angel, you can see the full MAE definition on page 5 of the merger agreement, but it excludes basically everything economic or results related.
And remember: Elon’s plan for TWTR involved taking an ax to TWTR in the near term to create long term value. An MAE needs to be a long term value hit, not a short term fluctuation in value, and the court has suggested the longer a time frame a buyer operates on, the longer the MAE must be judged on….
Without the suit, Elon would have closed in September. If Twitter can prove it wasn’t insolvent / financing was available then, does TWTR instantly win? It’s a good question! We’ve seen some evidence that financing would have been there if Elon had closed on time, and the market was higher back in mid-September. Could TWTR respond to an Elon failure to close for financing / insolvency with, “if you had closed on time none of this would have been in question?”
Yes, Twitter can…. but, unfortunately, those are not winning arguments. If Twitter definitively was solvent in September but went insolvent by the end of October, Elon will be able to get out of the merger (or at least have a good chance of it). Same for if financing was available but then disappeared. But this argument will be helpful for Twitter when proving Elon’s state of mind / bad faith.
Why would Elon not sit for a deposition? From the outside, it seems Elon is doing everything he can to avoid getting deposed (Twitter accused Musk of “seeking to evade” the deposition). He skipped his first deposition out of a pretty loose COVID concern (and he’s a pretty well known COVID skeptic / minimalist; Tesla was one of the first major companies to try to force employees back to the office), and then he submitted the stay / agree to close motion to the court before the rescheduled deposition could happen. That begs the question: is Musk trying to dodge deposition? If so, what is Musk so scared of in deposition?
Experts I talked to were pretty baffled on this question. Yes, sitting for a deposition isn’t fun……. but the worst that can really happen is you embarrass yourself and lose your trial. Given this is a civil case, if you were caught lying during your deposition, there wouldn’t be any criminal penalties, so even if Musk went to the deposition and said “the sky is green and Twitter isn’t a real company but a giant conspiracy run by our Martian overlords” the only consequences would be Elon needing to close on deal terms.
The best explanation I heard? Elon is no stranger to the court room; if he was caught flat lying in deposition here, that could be used against him in future court cases, so settling with Twitter now (when they had so much evidence against him) is a 3-D chess move to help him with future trials.
Can Elon even claim a solvency out? I mentioned in yesterday’s post how Judicial Estoppel might prevent Elon from claiming Twitter is insolvent and how his motion to stay might have already repped Twitter as solvent, but there are some who think Elon might not even be able to claim an insolvency out. The theory?
Section 5.9 of the merger agreement includes the line “Parent is Solvent as of the date of this Agreement, and each of Parent and the Company and its Subsidiaries (on a consolidated basis) will, after giving effect to the Merger or any other transaction contemplated by this Agreement, including the funding of the Financing, payment of the Funding Obligations, and payment of all other amounts required to be paid in connection with the consummation of the Merger or any other transaction contemplated by this Agreement and the payment of all related fees and expenses, be Solvent at and immediately after the Closing.” (Note that Musk’s acquisition sub is the “Parent” referred to here). I believe Lionel was the first to point this out (and he mentioned it on our podcast), but one interpretation of that sentence is that Musk cannot claim an insolvency out. Basically, if Musk tries to argue TWTR will be insolvent after close, you could argue that line simply calls for him to inject more equity / cash into the company in order to make it solvent. So the response to any insolvency claim is “Great Elon, throw another $1B in cash into the company to meet your side of the contract.”
I’m not sure, but it’s yet another arrow in the judge’s interpretation quiver given Elon’s continued bad faith in this case (assuming he doesn’t close on time!).
Decopac issues and appeal chances: If you’ve been following this trial, you’ve heard a lot about Decopac, a precedent case with a lot of similarities to this one where the Chancellor (who is also overseeing Musk / Twitter) made a specific performance ruling. Rather than appeal, the parties settled that case on original terms after the decision came out. A minority of experts thought the Decopac decision was wrong, and that if Twitter won a specific performance ruling Elon would stand a good chance of winning on appeal.
I’m very skeptical; a specific performance ruling would be a pretty standard contract interpretation ruling. An appeal would be heard by the Delaware Supreme Court, and the vast majority of experts I talked to suggested the Supreme Court would be very hesitant to get involved with a standard contract interpretation dispute. The only way they could see an appeal having a chance is if there’s some unique legal ruling here, and the facts on the ground just don’t support the type of ruling that gives an appeal a chance. Some expert quotes on chances of an appeal:
it's low. Again, when you look at the contract itself, if there was a debt financing closing condition, that would be a totally different story, but there's no debt financing closing condition. The closing conditions do not say if the debt is there, you must close. And they just didn't write it in there, they could have. They didn't.
In a case like this, I mean, my instinct is that the Chancellor is not going to make a mistake of law. And there is substantial difference to factual findings. So I don't think whoever loses in Chancery is going to have a lot of hope for any reversal.
Burnt hair and best efforts on financing: I’ve been making jokes about Elon’s new Burn Hair fragrance. It sold >20k bottles in about a day. On the one hand, it’s kind of meaningless… but on the other, it shows that when Elon really wants to sell something, people will line up to literally throw money at him. He raised a billion dollars from Larry Ellison on a single text, and several VCs basically cold called Elon to offer him hundreds of millions into the Twitter take private. So, yes, burnt hair is kind of meaningless, but it’s all part of a pattern that is going to make it very difficult for Elon to show that he actually used his “best efforts” to raise financing if the financing falls through.
Anyway, that’s it for me on Twitter unless there’s new news! I expect TWTR to close by the end of month; if that happens, this will likely be my last post on TWTR. If that doesn’t…. who knows, but I can almost certainly promise a bunch more posts on the new case in November!