And We’re Off: Twitter Sues Elon Musk And Lays Out A Strong Case

As we fully expected, Twitter is going to the Delaware Court of Chancery to force Elon Musk to give them the $44 billion he promised. There’s a lot of misinformation being spewed about this case, but let’s go through the details of why Musk is basically in deep shit, and will be lucky if he’s able to escape this by paying “only” $1 billion.

As we’ve said, contrary to the claims you will hear from Musk’s buffoonishly clueless supporters, this has nothing to do with how many spam accounts are on Twitter and whether or not Twitter is accurately counting them. That wouldn’t be an excuse to void the deal in the first place, because Twitter offered him the chance to understand those numbers and Musk rejected it both before and after the deal.

As we explained in our previous posts, it seems quite clear that Musk got cold feet a few weeks after the deal was signed, perhaps because his other stock holdings were tanking, perhaps because he was beginning to realize that he had no clue what to actually do with Twitter, or perhaps he just rolled over in bed one morning and thought “what the fuck have I done?”

At that point, he got his extraordinarily expensive lawyers to comb through the agreement to find any possible shred of a way he could get out of the deal. The problem, of course, is that the deal was pretty ironclad. The only thing they seemed to find was the clause that required Twitter to give Musk information he requested for the purpose of closing the deal — though the contract has caveats that leave it up to Twitter to determine if the requests are reasonable, and also to make sure that they wouldn’t do harm to Twitter’s business.

In response, it seems Musk and his fabulously wealthy-and-getting-wealthier lawyers cooked up a scheme to pretend that he’s super concerned about how spammers are counted, and kept asking for more and more information about it. Not, of course, to actually figure out how many spammers are on the platform, but to just keep coming up with more and more ridiculous requests for information so that they could then turn around and say Twitter wasn’t providing them what they needed, and therefore Twitter was in breach.

We laid all this out in previous posts, but the lawsuit does it much better and much more thoroughly, and adds new and embarrassing details for Musk. After laying out the details of the deal, including that Musk agreed to no financing contingency and no due diligence (oops), it notes that Musk clearly wanted out and cooked up this ludicrous scheme to get out:

After the merger agreement was signed, the market fell. As the WallStreet Journal reported recently, the value of Musk’s stake in Tesla, the anchor ofhis personal wealth, has declined by more than $100 billion from its November2021 peak.

So Musk wants out. Rather than bear the cost of the marketdownturn, as the merger agreement requires, Musk wants to shift it to Twitter’sstockholders. This is in keeping with the tactics Musk has deployed againstTwitter and its stockholders since earlier this year, when he started amassing anundisclosed stake in the company and continued to grow his position withoutrequired notification. It tracks the disdain he has shown for the company that onewould have expected Musk, as its would-be steward, to protect. Since signing themerger agreement, Musk has repeatedly disparaged Twitter and the deal, creatingbusiness risk for Twitter and downward pressure on its share price.

For those who keep claiming Musk’s change of mind has to do with the spam question, Twitter lays out how obviously bullshit that has been from the start (again, something we pointed out). Musk said from the beginning he wanted to rid the platform of spam, suggesting he believed that this was a major problem on the site and one that he would take care of. It makes no sense at all for him to then claim to be shocked that there was more spam than stated before.

Musk’s exit strategy is a model of hypocrisy. One of the chief reasonsMusk cited on March 31, 2022 for wanting to buy Twitter was to rid it of the“[c]rypto spam” he viewed as a “major blight on the user experience.” Musk saidhe needed to take the company private because, according to him, purging spamwould otherwise be commercially impractical. In his press release announcing thedeal on April 25, 2022, Musk raised a clarion call to “defeat[] the spam bots.”But when the market declined and the fixed-price deal became less attractive, Musk shifted his narrative, suddenly demanding “verification” that spam was not aserious problem on Twitter’s platform, and claiming a burning need to conduct“diligence” he had expressly forsworn.

Musk’s strategy is also a model of bad faith. While pretending toexercise the narrow right he has under the merger agreement to information for“consummation of the transaction,” Musk has been working furiously — albeitfruitlessly — to try to show that the company he promised to buy and not disparagehas made material misrepresentations about its business to regulators and investors.He has also asserted, falsely, that consummation of the merger depends on theresults of his fishing expedition and his ability to secure debt financing

And, yes, Twitter’s lawyers directly call out Musk’s announced reasons for trying to call off the deal as “pretextual” because that’s what they obviously were. It’s just so damn obvious to anyone watching the details that Musk wanted out, and this was the only escape hatch his lawyers could see as vaguely credible (but just barely so). I expected Twitter to call all this out, but I’m impressed at how directly and bluntly they do so:

These claims are pretexts and lack any merit. Twitter has abided byits covenants, and no Company Material Adverse Effect has occurred or isreasonably likely to occur. Musk, by contrast, has been acting against this dealsince the market started turning, and has breached the merger agreement repeatedlyin the process. He has purported to put the deal on “hold” pending satisfaction ofimaginary conditions, breached his financing efforts obligations in the process,violated his obligations to treat requests for consent reasonably and to provideinformation about financing status, violated his non-disparagement obligation,misused confidential information, and otherwise failed to employ required effortsto consummate the acquisition.

And then, there’s the bit that lots of people were also expecting: Twitter is going to court to try to force Musk to complete the deal he signed, which never had an escape clause like this.

Twitter is entitled to specific performance of defendants’ obligationsunder the merger agreement and to secure for Twitter stockholders the benefit ofMusk’s bargain. Musk and his entities should be enjoined from further breaches,ordered to comply with their obligations to work toward satisfying the few closingconditions, and ordered to close upon satisfaction of those conditions.

Now, I’ve seen some people note that this whole lawsuit (and we’ll get to some of the juicier bits soon) is all about what a terrible person and business person Elon Musk is, and thus it seems weird that they’re then trying to force such a terrible and untrustworthy person to own the company. But that’s not how this works. This is Delaware Chancery Court and the main thing that matters is “what’s best for the shareholders” and if what’s best for the shareholders is forcing the incredibly short-sighted, impossibly impetuous, trolling billionaire to pay them a decent premium on their shares, then… that may be exactly what happens.

The rest of the lawsuit is just an account of basically every ridiculous stupid thing that Elon Musk has done through the course of this saga. It’s quite something laid out in black and white and it’s worth reading the whole thing. It goes through the twists and turns that show how much of this appears to be that the world’s richest man can’t bother with pesky little things like understanding the consequences of his own actions, and focuses on making huge bets based solely on his intuition and with little care for facts or details.

Just as one example, in his rush to close the deal, Musk agreed to a few clauses in the agreement that are just incredibly friendly to Twitter (and incredibly useful in this litigation):

The agreement was negotiated through the night and, in the process,became even more seller-friendly. Among the provisions not contained in Musk’sproposal but included at Twitter’s insistence were an undertaking by defendants,including Musk, to “take or cause to be taken . . . all actions and to do, or cause tobe done, all things necessary, proper or advisable” to obtain the financing (alreadycommitted) to consummate the transaction, Ex. 1 § 6.10(a); a clear disclaimer ofany financing condition to closing, id. § 6.10(f); and a right on Twitter’s part torequest and promptly receive updates from Musk about his progress in obtainingfinancing, id. § 6.10(d). These provisions ensured that financing would be noobstacle to closing and that the company would have the right to stay informed ofMusk’s progress in arranging his financing.

Twitter also notes (and this was new to me) that part of the agreement that they added (which Musk’s proposal did not have) was the right to hire and fire at all levels of the company between the announced deal and Musk taking over. Musk originally did not want that, but then agreed to it. This is extremely noteworthy, because Musk’s lawyers tossed in another Hail Mary pretextual argument that Twitter’s firing of a few top executives after the deal was announced somehow violates the deal. Yet, as Twitter is showing here, Musk agreed explicitly that it would not.

Oops.

Also, it appears that the purchase agreement pretty much directly and somewhat explicitly excluded all of the reasons that Musk is now trying to lay out for voiding the deal:

The parties thus agreed that any circumstance affecting the marketgenerally or other social media companies would not excuse defendants fromclosing. Nor would any circumstance arising from the existence or performance ofthe agreement, or from any communication by Musk, “including the impact of anyof the foregoing” on any of Twitter’s relationships with, among others, customers.Likewise, matters that Twitter disclosed in sections of its SEC filings other thanthe “Risk Factors” and “Forward-Looking Statements” sections cannot constitute aCompany Material Adverse Effect. And Twitter’s failure to meet financialprojections will not excuse closing unless that failure results from an occurrenceindependently qualifying as a Company Material Adverse Effect (taking intoaccount all of the express exclusions).

Also, he can’t even escape if his financing partners bail on him:

Notwithstanding anything contained in this Agreement tothe contrary, the Equity Investor, Parent and AcquisitionSub each acknowledge and affirm that it is not acondition to the Closing or to any of its obligations underthis Agreement that the Equity Investor, Parent,Acquisition Sub and/or any of their respective Affiliatesobtain any financing (including the Debt Financing) forany of the transactions contemplated by this Agreement.

I mean, holy hell, Elon. How the fuck did you agree to sign this and then… get cold feet two weeks later? This is just astoundingly, embarrassingly bad. I know that your fans want to label you a super genius — and I sorta believed you were pretty damn smart myself until this whole debacle went down. Now you look like the kind of sucker who gets taken for a ride by street hustlers playing a three card monte.

Back to the details. Once again, the agreement makes clear Musk can’t back out by claiming Twitter didn’t share important information with him:

Nor is there any diligence condition. Indeed, each of Parent andAcquisition Sub represents that it “conducted, to its satisfaction, its ownindependent investigation, review and analysis of the business, results ofoperations, prospects, condition (financial or otherwise) or assets of the Companyand its Subsidiaries,” and that, in determining to proceed with the merger, each“relied solely on the results of its own independent review and analysis and thecovenants, representations and warranties of the Company” in the mergeragreement. Id. § 5.11. Parent and Acquisition Sub further acknowledge that“neither the Company nor any of its Subsidiaries, nor any other Person, makes orhas made or is making any express or implied representation or warranty withrespect to the Company or any of its Subsidiaries or their respective business oroperations, in each case, other than those expressly given solely by the Company inArticle IV,” and they represent that in agreeing to the merger they were not relyingon “any express or implied representation or warranty, or the accuracy or thecompleteness of the representations and warranties” in the merger agreement aboutTwitter and its business and its operations “other than those expressly given solelyby the Company in Article IV.”

In other words, even if — as many Musk fans keep wanting to insist — Twitter misled the SEC (and there’s little to no evidence to support that claim), in the merger agreement Musk explicitly said that he didn’t rely on such statements in the first place, and thus it wouldn’t make any difference at all.

I mean, kudos to Twitter’s lawyers who put together this purchase agreement, because they appear to have anticipated every stupid trick that Musk would try to pull.

Now, as for the other information sharing bit — the pretextual nonsense where Musk pretends Twitter isn’t sharing the info it promised him and which he needs to close the deal — Twitter’s lawyers dismantle that rather aggressively as well.

On May 21, 2022, Twitter hosted a third diligence session withMusk’s team and yet again discussed Twitter’s processes for calculating mDAUand estimates of spam or false accounts. Twitter also provided a detailed summarydocument describing the process the company uses to estimate spam as apercentage of mDAU.

Defendants responded with increasingly invasive and unreasonablerequests. And rather than use “reasonable best efforts to minimize any disruptionto the respective business of the Company and its Subsidiaries that may result fromrequests for access,” Ex. 1 § 6.4, defendants repeatedly demanded immediateresponses to their access requests. The scope of the requests and the deadlinesdefendants imposed on their satisfaction were unreasonable, disruptive to thebusiness, and far outside the bounds of Section 6.4.

Twitter nonetheless continued to work with Musk to try to respond tothe requests. It extended an ongoing offer to engage with Musk and hisrepresentatives regarding its calculation of mDAU, and held several more diligencesessions through the end of May. It also provided detailed written responses, including custom reporting, to his escalating requests for information.

On May 25, 2022, defendants’ counsel sent the first of a series ofaggressive letters copying their litigation counsel at Quinn Emmanuel. This onefalsely asserted that Twitter had “failed to respond to any” of defendants’information requests and insisted that defendants be granted access to the firehosedata so Musk could “make an independent assessment of the prevalence of fake orspam accounts on Twitter’s platform.” Though the letter called Twitter’s ownspam detection methodologies “lax,” it identified no basis for that charge.

Nor, again, did defendants explain how fulfillment of the firehose datademand would further consummation of the merger or what basis they had todemand the right to “make an independent assessment” of the prevalence of falseor spam accounts on the platform. Even assuming that was a proper purpose,reviewing the full firehose data would not result in an accurate assessment ormimic the rigorous process that Twitter employs by sampling accounts and usingpublic and private data to manually determine whether an account constitutes spam— as Twitter’s representatives had already repeatedly explained to Musk’s team.

On May 27, 2022, Twitter responded by noting its weeks-long activeengagement with Musk’s team and explaining that some of defendants’ requestssought disclosure of highly sensitive information and data that would be difficult tofurnish and would expose Twitter to competitive harm if shared. After all, Muskhad said he would do one of three things with Twitter: sit on its board, buy it, orbuild a competitor. He had already accepted and then rejected the first option, andwas plotting a pretextual escape from the second. Musk’s third option — buildinga competitor to Twitter — remained. Still, Twitter again responded constructivelyand reiterated its commitment to work with Musk’s team to provide reasonableaccess to requested information.

On May 31, 2022, defendants lobbed another missive, again falselyasserting that Twitter had “refused” to provide requested data and that thecompany’s spam or false account detection methods were “inadequate.” The letterclaimed Musk was willing to implement protocols to protect against “damage orcompetitive harm to the company.”

On June 1, 2022, Twitter responded by refuting that it had “refused”provision of data, demonstrating that, to the contrary, it had been working withMusk’s team to honor their requests within the bounds of the contract. To help setthe protocols Musk had said he was willing to honor, Twitter asked a series ofquestions directed at how the data would be used and by whom, and how it wouldbe protected.

Defendants’ response on June 6, 2022 made no effort to answer thosequestions or identify data-protection protocols; instead, it accused Twitter ofbreach and advanced a false narrative that Twitter had been stonewalling Musk’srequests. Musk publicly filed the letter, which repeated his baseless and damagingcharge that Twitter had “lax” detection methods. He included none of Twitter’scorrespondence in that filing and omitted all details about the information Twitterhad provided. He thus continued to present the public with a misleadinglyincomplete narrative about his communications with Twitter, with equallymisleading implications about the likelihood that the merger would be completedand about Twitter’s operations.

Steadfast in its commitment to consummate the merger, Twittercontinued to try to get Musk’s team what it demanded while safeguarding itscustomers’ data and harboring very real concerns about how Musk might use thedata if he succeeded in escaping the deal. On or about June 9, 2022, Musk’scounsel indicated that granting access to 30 days’ worth of historical firehose datawould satisfy Musk’s request for the firehose data. So, on June 15, the companygave Musk’s team secure access to that raw data — about 49 tebibytes’ worth. Itdid so even though the merger agreement did not require the sharing of thisinformation.

It goes on and on for a while. Basically, just as we presumed was happening from the outside, Musk and his lawyers just kept asking for more and more stuff, much of it useless or non-existent, and Twitter tried to do its best, and Musk just kept saying “not enough” which was basically exactly what appeared to be scripted out by his lawyers as the “excuse” to get out of the deal.

Also notable is that throughout all this Twitter tried to set up meetings with Musk to explain in detail how it calculates spam. And Musk basically blew them off — against demonstrating how this was nothing more than a pretextual excuse to bail on a deal he had promised.

Meanwhile, Agrawal and Twitter CFO Ned Segal had been trying toset up a meeting with Musk to discuss the company’s process in estimating theprevalence of spam or false accounts. On June 17, 2022, Segal proposed adiscussion with Musk and his team to “cover spam as a % of DAU.” Muskresponded that he had a conflict at the proposed time. When Agrawal sought to reengage on the matter, Musk agreed to a time on June 21, but then bowed out andasked Agrawal and Segal to speak with his team not about the spam estimationprocess but “the pro forma financials for the debt.”

This entire complaint is basically five dozen pages of how untrustworthy Musk is, and how he obviously wants to go back on his deal and is trying to come up with any excuse to do so. It seems highly likely that a judge reading through this will see how Musk’s position is nonsense.

Among the other eye opening bits in the filing: even as Musk claims the loss of top employees is one reason to bail on the deal, the complaint notes that Twitter sought Musk’s approval on an employee retention plan — and Musk refused to give it!

Most notably, Musk has unreasonably withheld consent to twoemployee retention programs designed to keep selected top talent during a periodof intense uncertainty generated in large part by Musk’s erratic conduct and publicdisparagement of the company and its personnel.

During negotiation of the merger agreement, Twitter had soughtMusk’s consent to a broad retention plan. Musk’s team deferred decision on thematter; the plan Twitter proposed was detailed, and time for negotiation was short.But Musk indicated he was open to further discussion.

During a May 6, 2022 post-signing diligence session, Twittermanagement again broached the subject of retention, and Musk was noncommittal. He suggested the matter be tabled pending further clarity on theexpected interval before closing the deal.

Over the weeks that followed, Swan discussed with Twittermanagement a narrower retention plan than the one that had been discussed duringthe merger agreement negotiations. Consistent with those discussions, on June 20,2022, Twitter sent defendants a formal request for consent to two tailoredemployee retention programs that had been vetted by the board and itscompensation committee with the assistance of an outside compensation consultant.

Musk initially failed to respond at all to the June 20 consent request.(It would soon become clear that he had fired Swan.) After a follow-up request forconsent, Musk’s counsel stated tersely that “Elon is not supportive of this programand has declined to grant consent for it.” Twitter offered to arrange a meetingbetween Musk and Lane Fox to explain the importance and utility of the proposedprograms. Musk’s counsel repeated that Musk “doesn’t believe a retentionprogram is warranted in the current environment,” and said Musk was unwilling toconsider the advice of compensation consultants, but left open the possibility ofspeaking with Lane Fox.

On June 28, 2022, following further stonewalling from Musk’scounsel, Twitter urged that a discussion would be fruitful. After initiallysuggesting Musk might be “amenable to a call next week,” Musk’s counsel replied,“Elon already gave his response but I’ll remind him of Martha’s request for a call.”The call never happened — Musk has continued to duck it — and neither retentionprogram has been implemented due to defendants’ unexplained and unreasonablewithholding of consent. Employee attrition, meanwhile, has been on the upswingsince the signing of the merger agreement.

Given all that, for Musk to claim that employees leaving was a reason he’s backing out of the deal is just so so incredibly rich. This entire complaint is basically showing that everything Musk does is in bad faith. Honestly, reading this, it’s difficult to see why anyone should ever trust Musk in any business deal ever again.

The lawyers even included some late breaking tweets, in which Musk posted ridiculously laughable memes implying that this whole mess was all part of his plan to force Twitter into court to reveal the information he wanted revealed. But, in doing so, he’s effectively admitting that this entire thing was pretextual bad faith actions — which… um.. does not make him look good. Especially not in the eyes of a court that deals with business disputes all the time.

In the early morning of July 11 (Eastern time), Musk posted Tweetsimplying that his data requests were never intended to make progress towardconsummating the merger, but rather were part of a plan to force litigation inwhich Twitter’s information would be publicly disclosed:

For Musk, it would seem, Twitter, the interests of its stockholders,the transaction Musk agreed to, and the court process to enforce it all constitute anelaborate joke.

There’s more in there, but this is an incredibly strong filing in multiple ways. It’s clear and direct. It lays out the timeline of what happened, in a manner that shows repeated actions by Musk that appear to be in bad faith. It demolishes each of the pretextual excuses for getting out of the deal, and provides a strong narrative explaining why Musk is acting this way.

Musk has good lawyers too, but they’ve got very, very little to work with here.

Honestly, the real question is how much Musk is willing to roll the dice on $44 billion. He’s gotten lucky on so many gambles in life before, it wouldn’t surprise me to see him just keep fighting this case, even with an extremely high probability of a pretty significant loss.

It still strikes me that the most likely outcome is that Musk and Twitter come to an agreement on some number that Musk has to fork over to settle this and walk away from the deal (while getting Twitter to drop the lawsuit). That result is probably in Musk’s best interest, as there is a very real possibility that the court will order him to pay the full $44 billion (and it’s also possible his financing partners back out after seeing all this — but that won’t matter, Musk will still be on the hook for the amount).

Honestly, if Musk can get out of this while paying “only” $1 billion, or even $5 billion, it might be a hell of a deal for him, and much better than the alternative. And, that’s not even getting into the inevitable shareholder lawsuits against Musk for his actions that they can credibly argue torched Twitter’s value over the last few months.

None of this is a slam dunk, but it’s difficult to read this filing, which confirms and adds to much of what we’ve reported over the last three months, and see anything other than that Musk is in deep shit right now from all of this.