Mergers and Acquisitions: Lessons from the Elon Musk/Twitter Litigation
As the richest man in the world, a business mogul behind successful tech brands like Tesla and Space-X, and with over 113 million followers on Twitter, it is not surprising that there are countless controversies trailing his public posts. In this article, I will pinpoint the genesis of the Musk/Twitter litigation saga and draw out lessons and takeaways for tech businesses.
The Musk/Twitter Litigation Timeline
In a classic silent move that could have gone unnoticed, save for the mandatory Securities and Exchange Commission (SEC) filings, Elon Musk started buying Twitter shares in January 2022.
By April 2022, he had acquired 9.2%, making him the largest shareholder. Following public knowledge of his ownership position, Elon proposed a full buyout of Twitter at $54.20 per share which the board of directors initially tried to stop with the poison pill clause, but eventually accepted.
Less than a month later, Musk tweeted that the mergers and acquisition (M&A) deal is on hold because he has concerns over some of Twitter’s practices. By June 2022, Musk makes his intention known to cancel the deal if Twitter fails to abide by his requests for more information about bot accounts.
Twitter replies that all information requested had been provided and then sued Musk for specific performance of the M & A deal. Musk counterclaims that sufficient information is not provided as requested and that his opinion is not sought before Twitter makes some business decisions.
The court rules in favour of Twitter and compels Musk to close the deal latest Oct 28, 2022. Musk eventually seals the deal at the original offer on Oct 27, 2022.
Musk’s M & A Counterclaims
It is important to highlight the key focus of Musk’s counterclaim in the Twitter M & A lawsuit because they directly touch on foundational M&A principles. Relying on the two core provisions that allow a party to terminate an M & A agreement, Musk accused Twitter of making misrepresentations about bot and spam accounts and materially breaching covenants. Twitter’s defence was that Musk cannot claim ignorance of the existence of bots and that the quoted figures of mDAU (monetizable daily active users) are estimates. In addition, the burden of proof is on Musk to prove that this alleged misrepresentation is reason enough to terminate on the basis of “material adverse effect” (MAE). This is not an easy task, making Musk liable to pay $1 billion in termination fees.
Lessons for Business Owners from the Musk/Twitter Litigation
Now that the deal is successfully completed for $44 billion after much drama, there are some lessons those considering a merger and acquisition can learn from the one-year-long episode.
Never Act on Impulse: Taking a look at the back-and-forth conversation between Musk and Twitter from his acquiring a majority stake, to refusing to join the board on invitation, to proposing the buyout, to attempting to cancel and eventually closing the deal, it is possible to interpret his actions as impulsive. While Musk’s impulsiveness might have worked out for his $5.7 billion The Boring Company, it does not seem to be the case with the Twitter acquisition.
Always Do Your Due Diligence: One would assume that if someone was spending $44 billion, they would conduct their due diligence. However, as seen in Twitter’s response to Musk’s counterclaim, it becomes evident that no due diligence was done by Musk before signing. In fact, rather than following the usual M & A process, Musk relied on public information.
Get it Down in Writing: Twitter shareholders started the lawsuit because they were fed up with Musk’s on-and-off approach to the M & A. Elon Musk would have probably had an easy time walking away if not for the binding contract. This highlights the importance of ensuring to always get it down in writing.
Take Legal Action Promptly: There was a lot at stake for Twitter: its reputation and plummeting share prices. Taking legal action promptly by suing Musk to compel him to meet his end of the bargain, helped them start out on the right foot.
Even after making a commitment, not all M & A deals are completed. It is important to ensure appropriate legal protections are in place once conversations on an M & A begin. Where litigation is inevitable like in the Musk/Twitter litigation, securing the services of a seasoned litigation lawyer could be the silver lining you and your business need.