Dimitrios Kambouris
Elon Musk announced he is terminating his $44B acquisition of Twitter, Inc. (NYSE:TWTR) in a filing with the Securities and Exchange Commission. The stock had already sold off 5% on the day before the filing appeared. If you read the termination filing, it sounds reasonable enough for him to call of the deal. In the end, according to the filing, it comes down to Musk terminating because Twitter does not want to deliver certain information, as well as for two other reasons. He cites section 6.4 of the merger agreement specifically (emphasis mine):
While Section 6.4 of the Merger Agreement requires Twitter to provide Mr. Musk and his advisors all data and information that Mr. Musk requests “for any reasonable business purpose related to the consummation of the transaction,” Twitter has not complied with its contractual obligations. For nearly two months, Mr. Musk has sought the data and information necessary to “make an independent assessment of the prevalence of fake or spam accounts on Twitter’s platform” (our letter to you dated May 25, 2022 (the “May 25 Letter”)). This information is fundamental to Twitter’s business and financial performance and is necessary to consummate the transactions contemplated by the Merger Agreement because it is needed to ensure Twitter’s satisfaction of the conditions to closing, to facilitate Mr. Musk’s financing and financial planning for the transaction, and to engage in transition planning for the business. Twitter has failed or refused to provide this information. Sometimes Twitter has ignored Mr. Musk’s requests, sometimes it has rejected them for reasons that appear to be unjustified, and sometimes it has claimed to comply while giving Mr. Musk incomplete or unusable information.
But he leaves out interesting qualifiers to his right to information. Here is text of section 6.4 verbatim as in the merger agreement with my added emphasis:
Section 6.4 Access to Information; Confidentiality. Upon reasonable notice, the Company shall (and shall cause each of its Subsidiaries to) afford to the representatives, officers, directors, employees, agents, attorneys, accountants and financial advisors (“Representatives”) of Parent reasonable access (at Parent’s sole cost and expense), in a manner not disruptive in any material respect to the operations of the business of the Company and its Subsidiaries, during normal business hours and upon reasonable written notice throughout the period commencing on the date of this Agreement until the earlier of the Effective Time and the termination of this Agreement pursuant to Article VIII, to the properties, books and records of the Company and its Subsidiaries and, during such period, shall (and shall cause each of its Subsidiaries to) furnish promptly to such Representatives all information concerning the business, properties and personnel of the Company and its Subsidiaries as may reasonably be requested in writing, in each case, for any reasonable business purpose related to the consummation of the transactions contemplated by this Agreement; provided, however, that nothing herein shall require the Company or any of its Subsidiaries to disclose any information to Parent or Acquisition Sub if such disclosure would, in the reasonable judgment of the Company, (i) cause significant competitive harm to the Company or its Subsidiaries if the transactions contemplated by this Agreement are not consummated, (II) violate applicable Law or the provisions of any agreement to which the Company or any of its Subsidiaries is a party, or (III) jeopardize any attorney-client or other legal privilege. No investigation or access permitted pursuant to this Section 6.4 shall affect or be deemed to modify any representation or warranty made by the Company hereunder. Each of Parent and Acquisition Sub agrees that it will not, and will cause its Representatives not to, use any information obtained pursuant to this Section 6.4 (or otherwise pursuant to this Agreement) for any competitive or other purpose unrelated to the consummation of the transactions contemplated by this Agreement. Parent will use its reasonable best efforts to minimize any disruption to the respective business of the Company and its Subsidiaries that may result from requests for access under this Section 6.4 and, notwithstanding anything to the contrary herein, the Company may satisfy its obligations set forth above by electronic means if physical access is not reasonably feasible or would not be permitted under applicable Law as a result of COVID-19 or any COVID-19 Measures. Prior to any disclosure, the Company and Parent shall enter into a customary confidentiality agreement with respect to any information obtained pursuant to this Section 6.4 (or otherwise pursuant to this Agreement).
In my layman’s opinion, I’m not any kind of lawyer, Musk has chosen this path because he’s really needing to stretch to try and substantiate a credible reason for termination. It’s not something he can decide to do. The merger agreement specifies the conditions under which either party can terminate.
I believe Musk has been going through a song-and-dance pretending to be really interested in this information about spam accounts, likely requesting ridiculous things that Twitter can’t or won’t comply with. The end goal is being able to claim Twitter isn’t delivering information as it is supposed to per the merger contract. Theoretically, this gives him an out.
In my view, it won’t hold up if Twitter sues for specific performance (which means Musk has to close the deal). I’ve gone over the reasons in past articles and they are more or less as follows:
A termination should only work if:
-
the requested information is reasonable
It is not clear at all whether the information requests are reasonable. There is a very funny paragraph in Musk’s termination letter (emphasis mine):
Despite public speculation on this point, Mr. Musk did not waive his right to review Twitter’s data and information simply because he chose not to seek this data and information before entering into the Merger Agreement. In fact, he negotiated access and information rights within the Merger Agreement precisely so that he could review data and information that is important to Twitter’s business before financing and completing the transaction.
This is basically an acknowledgment that Musk views gathering the financing and completing the transaction as something optional. Activities he could undertake if he liked the data and information that he was to receive in the interim.
A) That view justifies Twitter being even more precarious about the data it provides. The company doesn’t need to provide data that endangers the deal that is in place.
B) Musk’s “optionality” view is false. He already signed the deal and he’s supposed to complete it and that’s not subject to his view of data or his ability to raise financing or information provided to him after that fact.
-Twitter has to be granted an opportunity to cure any information deficiency. It would greatly surprise me if Musk’s requests were reasonable, he threatened termination if he didn’t get it, AND the board then subsequently chose not to provide such information.
-Musk has in the past threatened with a plan B if he couldn’t acquire Twitter. I can imagine this helps Twitter argue why Musk can’t be provided with certain information. Why provide all this business-sensitive information to someone who threatens to walk away and possibly start or invest in a competitor?
2. In my view the whole spam matter may not be material to the deal to begin with (keep in mind I’m not a law professional or expert). If Musk terminates based on not being provided with certain information, it is relevant how material this information really is. Ultimately, that’s up to the judge.
It is not clear whatsoever that the information about fake/spam users meets this material standard. This is widely assumed to be the case because Musk is raising such a stink about it.
However, the way I see it; Twitter’s revenue and profit are Twitter’s revenue and profit. The profit/revenue numbers are the numbers whether there were ten thousand fake accounts or a billion fake accounts. I could even argue Musk is making a better deal the more the number of fake accounts is being understated. After all, that leaves him with a larger total addressable market and Twitter is able to generate its revenue of a smaller number of users which means higher ARPU.
What information is Twitter failing to provide according to Musk?
There are different pieces of information Musk is allegedly not granted access too. Let’s go over these piece-by-piece:
1. Spam. Here is the verbatim text with my emphasis and commentary below:
Information related to Twitter’s process for auditing the inclusion of spam and fake accounts in mDAU. Twitter has still not provided much of the information specifically requested by Mr. Musk in Sections 1.01-1.03 of the May 19 diligence request list that is necessary for him to make an assessment of the prevalence of false or spam accounts on its website. As recently as the June 29 Letter, Mr. Musk reiterated this long-standing request for information related to Twitter’s sampling process for detecting fake accounts. The June 29 Letter identified specific data necessary to enable Mr. Musk to independently verify Twitter’s representations regarding the number of mDAU on its platform—including, but not limited to (1) daily global mDAU data since October 1, 2020; (2) information regarding the sampling population for mDAU, including whether the mDAU population used for auditing spam and false accounts is the same mDAU population used for quarterly reporting; (3) outputs of each step of the sampling process for each day during the weeks of January 30, 2022 and June 19, 2022; (4) documentation or other guidance provided to contractor agents used for auditing mDAU samples; (5) information regarding the user interface of Twitter’s ADAP tool and any internal tools used by the contractor agents; and (6) mDAU audit sampling information, including anonymized information identifying the contractor agents and Quality Analyst that reviewed each sampled account, the designation given by each contractor agent and Quality Analyst, and the current status of any accounts labelled “compromised.” A subsequent request along these lines should not have been necessary, as this information should have been provided in response to Mr. Musk’s original diligence request. Yet, to date, Twitter has not provided any of this information.
I’m not sure why Twitter did apparently not comply with the above. But it could be for privacy reasons or simply because it is not reasonable in a $44 billion deal that’s already been signed to request identifying information of a contractor agent who reviewed whether a specific Twitter account was a fake account or not…
the June 29 Letter also reiterated requests for data specifically identified in Sections 1.04-1.05 of the May 19 diligence request list regarding Twitter’s methodology and performance data relating to identification and suspension of spam and false accounts, including, but not limited to, information regarding account suspensions, including information sufficient to identify daily numbers of account suspensions since October 2020 and numbers of account suspensions for each of Twitter’s internal reasons for suspension. In addition, during the June 30, 2022 call, Twitter’s representatives indicated for the first time that the workflow and processes for detecting spam and false accounts in the mDAU population is different and separate from the workflow and processes for identifying and suspending accounts in violation of Twitter’s policies. On that call, Twitter indicated that it would not be willing to provide information regarding the methodologies employed to identify and suspend such accounts (emphasis supplied).
Here Musk is citing an issue (among others) first identified by him on the June 30 call. To me, that clearly means Twitter did not get enough time to cure any “real or perceived” deficiency in the information provided. It also seems entirely logical the workflows mentioned are different and separate as these have clearly different parameters and goals.
Daily measures of mDAU for the past eight (8) quarters. On June 17, 2022 (the “June 17 Letter”) Mr. Musk reiterated his request for “access to the sample set used and calculations performed, as well as any related reports or analysis, to support Twitter’s representation that fewer than 5% of its mDAUs are false or spam account.” To that end, Mr. Musk requested that Twitter provide “daily measures of mDAU for the previous eight quarters, and through the present.” This information is derivative of the information Mr. Musk first sought in Sections 1.01-1.03 of the May 19 diligence request list. Although Twitter has provided certain summary data regarding the mDAU calculations, Twitter has not provided the complete daily measures as requested.
I don’t know why Twitter isn’t providing this, but I don’t think it will be enough to cancel a merger over.
Board materials related to Twitter’s mDAU calculations. In the June 17 Letter, Mr. Musk requested a variety of board materials and communications related to Twitter’s mDAU metric, its calculation of the number of spam and false accounts, its disclosure of the mDAU metric, and the company’s disclosure of the number of spam accounts on the platform. Twitter has provided an incomplete data set in response to this request, and has not provided information sufficient to enable Mr. Musk to make an independent assessment of Twitter’s board and management’s understanding of its mDAU metric.
It seems a bit unreasonable to request board materials of a time when you weren’t on the board. Even more so, if you’ve been given the opportunity to be on the board and you declined it.
Materials related to Twitter’s financial condition. Mr. Musk is entitled, under Section 6.4 of the Merger Agreement to “all information concerning the business … of the Company … for any reasonable business purpose related to the consummation of the transactions” and under Section 6.11 of the Merger Agreement, to information “reasonably requested” in connection with his efforts to secure the debt financing necessary to consummate the transaction.
To that end, Mr. Musk requested on June 17 a variety of board materials, including a working, bottoms-up financial model for 2022, a budget for 2022, an updated draft plan or budget, and a working copy of Goldman Sachs’ valuation model underlying its fairness opinion. Twitter has provided only a pdf copy of Goldman Sachs’ final Board presentation.
I’ve been over section 6.5 already and do not believe Musk needs these materials to consummate the transaction. Under section 6.11, it does say information reasonably requested to secure debt financing. However, section 6.11 comes with a bunch of qualifiers, and these are highly restrictive (emphasis by me):
(C) neither the Company nor any of its Subsidiaries (nor any of their respective boards of directors (or similar governing bodies) shall be required to adopt any resolutions, execute any consents or otherwise take any corporate or similar action or deliver any certificate, document, instrument or agreement in connection to the Bank Debt Financing or the incurrence of indebtedness thereby or any cooperation required by this Section 6.11(A) and (D) no cooperation under this Section 6.11(A) shall (I) require the Company or any of its Subsidiaries to provide, or cause to be provided, any information the disclosure of which is prohibited or restricted under applicable Law or any binding agreement with a third party or is legally privileged or consists of attorney work product or could reasonably be expected to result in the loss of any applicable legal privilege, (II) require the Company or any of its Subsidiaries to take any action that would reasonably be expected to conflict with or violate its organizational documents or any Laws or would reasonably be expected to result in (with or without notice, lapse of time, or both) a violation or breach of, or default under, or give rise to any right of termination, cancellation or acceleration of any right or obligation of such Person or to a loss of any benefit or privilege to which such Person is entitled under, any agreement to which the Company or any of its Subsidiaries is a party or result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries, except any Lien that becomes effective only upon the Closing, (III) cause (or require the taking of any action that would cause) any representation or warranty in this Agreement to be breached or cause any condition to Closing to fail to be satisfied or otherwise cause any breach of this Agreement or require the Company to waive or amend any terms of this Agreement, (IV) require the Company to disclose any material, non-public information other than to recipients of such information that agree to confidentiality arrangements as contemplated under Section 6.11(B) and Section 6.4 or any adjustments or assumptions used in connection therewith, (V) require the Company to prepare or provide any financial statements or other financial information (other than those financial statements (and any other financial information) from time to time filed by the Company with the SEC (and nothing in this Section 6.11(A) shall create or be implied to create any obligation to make any such filings or other readily available financial information), (VI) waive or amend any terms of this Agreement, (VII) require the Company or its Subsidiaries to take any action that, in the good faith determination of the Company or such Subsidiary would create a risk of damage or destruction to any property or assets of the Company or such Subsidiary, (VIII) require the Company or any of its Subsidiaries or any of their Representatives to deliver any legal opinions or reliance letters, (IX) file or furnish any reports or information with the SEC or change any fiscal period or accelerate the Company’s preparation of its SEC reports or financial statements, or (X) prepare or provide any (1) information regarding officers or directors prior to consummation of the Merger, executive compensation and related party disclosure or any Compensation Discussion and Analysis or information required by Item 302 (to the extent not so provided in SEC filings) or 402 of Regulation S-K under the Securities Act and any other information that would be required by Part III of Form 10-K (except to the extent previously filed with the SEC), (2) any description of all or any component of the Bank Debt Financing or other information customarily provided by the Financing Sources or their counsel, (3) risk factors relating to all or any component of the Bank Debt Financing, (4) information regarding affiliate transactions that may exist following consummation of the Merger, or (5) other information that is not available to the Company without undue effort or expense. The parties hereto agree that any information with respect to the prospects, projections and plans for the business and operations of the Company and its Subsidiaries in connection with the Financing will be the sole responsibility of Parent, and none of the Company, any of its Subsidiaries or any of their respective Representatives shall be required to provide any information or make any presentations with respect to capital structure, the incurrence of the Financing, other pro forma information relating thereto or the manner in which Parent intends to operate, or cause to be operated, the business of the Company or its Subsidiaries after the Closing. Nothing contained in this Section 6.11 or
Especially this piece seems to undermine Musk’s efforts greatly:
The parties hereto agree that any information with respect to the prospects, projections and plans for the business and operations of the Company and its Subsidiaries in connection with the Financing will be the sole responsibility of Parent, and none of the Company, any of its Subsidiaries…
Musk also cites another reason for termination. In my view, this is another legal dead-end:
Finally, Twitter also did not comply with its obligations under Section 6.1 of the Merger Agreement to seek and obtain consent before deviating from its obligation to conduct its business in the ordinary course and “preserve substantially intact the material components of its current business organization.” Twitter’s conduct in firing two key, high-ranking employees, its Revenue Product Lead and the General Manager of Consumer, as well as announcing on July 7 that it was laying off a third of its talent acquisition team, implicates the ordinary course provision. Twitter has also instituted a general hiring freeze which extends even to reconsideration of outstanding job offers. Moreover, three executives have resigned from Twitter since the Merger Agreement was signed: the Head of Data Science, the Vice President of Twitter Service, and a Vice President of Product Management for Health, Conversation, and Growth. The Company has not received Parent’s consent for changes in the conduct of its business, including for the specific changes listed above. The Company’s actions therefore constitute a material breach of Section 6.1 of the Merger Agreement.
Ironically, Musk tweeted he has a “superbad feeling about the economy.” Tesla (TSLA) is implementing hiring freezes and laying off people. Here he’s arguing similar measures are not an ordinary course of business and reason for a deal termination when it comes to Twitter.
It is very common for tech companies to be engaging in these practices in this market. I can’t see a judge faulting Twitter for what is pretty much industry-standard behavior. Finally, it is hardly material to begin with freeze talent hires for a couple of quarters and have a couple of execs leave (you could argue this is sometimes important in the case of superstar performers but that’s not really the case here). There is also a reasonable case to be made the execs leaving are (in part) due to (or influenced by) Musk’s takeover in the first place.
Conclusion
Musk is terminating the merger agreement. I don’t think he can terminate in accordance with the merger agreement. I expect Twitter to sue for specific performance and request some kind of accelerated trial. Musk is either going to close after all, settle for a small discount or be forced to close. I do expect Monday will provide a very attractive entry point to acquire Twitter shares.
Be the first to comment