Is Musk Getting Cold Feet?​

By Jake Rickman​


What do you need to know this week?

Elon Musk appears to be backtracking on the terms of the deal he has struck with the board of Twitter. On Tuesday, Musk tweeted that the deal cannot move forward unless Twitter can demonstrate that less than 5% of its users are bots.

Twitter later released a statement saying it is “committed to completing the transaction on the price and terms as promptly as practicable.”

While a lot can be said about Musk’s style of dealmaking, from a legal perspective, Musk’s options are limited. Even if his claim that Twitter has more bots than it previously disclosed is true (which has not been confirmed), it is unlikely he will be released from the purchase agreement.

Why is this important for your interviews?

Most billion-dollar dealmaking takes place behind closed doors. That Musk has decided to air the discussions publicly provides us with an irresistible chance to examine some of the legal and commercial factors at play before a publicly announced transaction closes.

Indeed, it is first important to remember that the deal has not yet closed. That is, the shares have not exchanged hands: most of Twitter’s shares are still held by public shareholders. There are several conditions that both parties must fulfil before the deal can complete. If they are not met, then in certain cases either party can walk away.

A full account of these conditions can be found in a prospectus circulated to Twitter shareholders recently, some of which (located on page 14) include:

- Twitter’s shareholders not approving the proposal;
- the accuracy of Twitter’s representations and warranties; and
- the absence of any “Company Material Adverse Effects”.

Importantly, it is not a condition of the deal that Twitter’s total userbase not exceed 5% bots — if this were the case, it would probably be given as a representation and/or warranty, which are legally enforceable terms. Provided such a term existed and it was broken, Musk may have a leg to stand on.

Absent that, the best argument Musk can make is that, if indeed bots make up more than 5% of the user base, then this constitutes a Company Material Adverse Effect (CMAE), which is a customary term in acquisition agreements that essentially permits the buyer to walk away if the target business’ operations are substantially interrupted under certain conditions.

That said, CAME’s are notoriously difficult for the buyer to prove. Twitter has also made a point of recognising in its annual reports that the true number of bots may be higher than its estimate. In short, Musk faces an uphill battle if he intends to use this as a reason to abandon the deal.

How is this topic relevant to law firms?

Of course, just because it might be difficult does not mean Musk won’t try. If he does, Twitter will invoke the $1bn termination fee and sue Musk to make him pay. Litigation like this will cost both parties millions alone in fees.

Skadden presently represents Musk; Twitter is represented by Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett