from contracts,-how-do-they-work-? department
Bloomberg’s Matt Levine, whose coverage of the Elon Musk/Twitter saga has been great (his coverage of most things has been great, but mostly Musk/Twitter stuff), recently wrote that he was coming to the conclusion that Elon Musk just doesn’t know what a merger deal means.
As he explains, if you want to buy a business, but still want to do your due diligence, you can first draft a memorandum of understanding that more or less says you’re going to buy it, but leave aside if your due diligence reveals bad things. But what are you should not do is sign a obligatory merger agreement which explicitly give up due diligence, then try to demand due diligence and claim that you can always opt out of the agreement.
I think the simplest explanation might be that Elon Musk doesn’t know what a merger deal is. It’s not uncommon around the world for two companies to come together and talk about buying the other. And sometimes those talks will go well and they’ll get together and sign some kind of document — a “memorandum of understanding,” maybe — that says, basically, “now we’re going to talk very seriously about my purchase.” “. Sometimes they will have a price lined up when they sign this document, say $54.20, and that price will be written in the document, and the buyer will be expected to eventually pay $54.20 to buy seller. But things can go wrong. There will be ongoing due diligence, where the buyer reviews the seller’s business, and the buyer might change their mind. Facts could come to light during the due diligence that could cause the buyer to walk away or want to revise the price downwards. The market could collapse, making the seller less valuable or making it harder for the buyer to obtain financing. The MOU is an agreement to talk more seriously; this reflects a general mutual desire to reach an agreement at $54.20, but it is not binding. No one is committed to a $54.20 deal. Nothing is certain until the final agreement is signed.
This, again, is a description of something that can happen in the world; some business acquisitions go through a process like that. But this is not a description of US Public Company Merger Agreements. In normal US public company mergers, you don’t sign a memorandum that says “we’re going to negotiate seriously to buy you out.” You negotiate seriously, and then you sign a merger agreement saying “we agree to buy you for $54.20”. And then if the buyer changes his mind, he still has to pay $54.20. And if the market crashes, the buyer still has to pay $54.20. Business is business; once signed, the merger pact is binding and final.
Read the whole thing for more information.
Either way, the Musk/Twitter fight continues, and Twitter’s letter to the judge asking for sanctions against Musk, which revealed text messages that were shown to Twitter by Musk’s financial advisers (but not by Musk himself), was eventually unsealed (noted for the first time by the excellent Chancery Daily). And some details suggest that Levine is 100% right. and that Musk has no idea what a merger deal is, as he was telling his advisers at Morgan Stanley that he wanted to do more due diligence after signing the agreement in which he explicit waiver of due diligence (first highlighted by Kostia Medvedovsky on Twitter).
In these text messages to Morgan Stanley’s Michael Grimes (and not, as some people have mistakenly assumed, Musk’s ex, singer Grimes), Musk repeatedly talks about the need for due diligence . after signing the agreement, and how he wanted to get off the case if due diligence revealed things he didn’t like. It’s May 8, two weeks after he signed the merger agreement in which he waived all due diligence.
If you don’t see the image above, the texts say:
An extremely fundamental piece of due diligence is understanding exactly how Twitter confirms that 95% of its daily active users are both real people and not double counted.
If that number is closer to 50% or less, which I’m guessing from my feed, then they’ve fundamentally misrepresented Twitter’s value to advertisers and investors.
To be very clear, this deal moves forward if it passes due diligence, but obviously not if there are huge gaping holes.
That’s not how it all works.
And, to be clear, those texts came about half an hour after Musk texted the same guy to say he wanted to “slow down” the deal, because he said “it won’t make any sense to buy Twitter if we’re heading into WW3 Of course by then he had already engaged.
So anyway, there are several things to note about all of this.
- His inability to deliver the texts is really bad. Failure to comply with discovery can come back to bite you.
- While the ‘slowdown’ texts were revealed in last week’s hearing, it really confirms that Musk is trying to pull out of the deal because of cold feet, and not any of that spam nonsense. , something he came up with half a century ago. an hour later as he realized he couldn’t just bail out because of “WW3”.
- My God doesn’t he understand anything. Not only does he seem to not understand that you are doing your due diligence before you sign a merger agreement in which you waive all due diligence, but he still seems to think that Twitter claims that 95% of their “daily active users” are “real people”. But, as we’ve explained time and time again (and surely, someone has explained it to Musk), Twitter never said that 95% of its daily active users are real people. Twitter has still clarified that the number they report, mDAU, is their estimate of “monetizable” daily active users, meaning they already excluded bots/spam, etc. The number of 5% is an estimate made having already ruled out all that other stuffand manually check a statistically significant sample to see if they missed any spam.
- What kind of fool thinks that as the richest man in the world, with 100 million Twitter followers, his own experience with his own feed is somehow representative of the service as a whole? I mean, I get that he’s not the empathetic type, but seriously? Can’t he recognize that his personal experience is not the norm?
Honestly, this is all pretty amazing. Chancellery every day also note that the formal nature and full sentences of later texts (not to mention the 30-minute break between the initial texts and the last) would at least fit a scenario in which Musk sends the “uh oh, WW3, slow down!” texts and then someone calls him and says “man this is all discoverable in the inevitable trial and you can’t get out because of world war 3” and so then Musk is getting fancy with his ‘due diligence’ and ‘spam’ nonsense.
The document also suggests that Musk is hiding texts from discovery, including Twitter noting an exchange between Musk and a banker, Robert Steel, in which it is clear that Steel is responding to texts from Musk, but those texts are not present.
You don’t have to be Sherlock Holmes to notice that a text or two from Musk seems to be missing.
Anyway… while all of this was going on, the Twitter shareholder voted on whether or not to approve the deal too past. This has been in the works for a while, and if everything had gone according to plan (ha!), it would have been one of the last steps before the deal was done. Now it’s just a background thing. And, yes, shareholders approved the deal. Because they’re not dumb and they know that’s the most likely way to get a payday.
So in the end, the shareholders approved the deal to sell Twitter to a guy who still doesn’t seem to understand that he signed a binding agreement to do so.
Filed Under: delaware chancery court, discovery, elon musc