Canada: Twitter v. Elon Musk - Part 1: What We Know So Far

Andrew Gray (00:05): The acquisition of Twitter by Elon Musk is in jeopardy. And the ups and downs of this atypical transaction saga have caught the attention of the media, investors and mergers and acquisitions practitioners. We're going to discuss what's at stake now that the dispute about the deal is moved to litigation, where Twitter is looking to force the deal to close on its terms. That is, it wants an order requiring specific performance by Musk. The unconventional way this proposed acquisition arose, the speed at which an agreement was consummated, and the almost immediate challenges to the transaction all engage in important questions of securities and corporate law. And after laying out the key parts of the story of this deal coming together and falling apart, we're going to look at the somewhat novel prominence in the dispute of the access to Information Covenant in the M&A contract. The post-signing, pre-closing obligation of a target to share information with the bidder in connection with the consummation of the transaction. Other COVID-era busted deals have principally engaged the material adverse effect concept in relation to closing conditions or compliance with interim operating covenants. This dispute raises some of those points as well, but it is principally about the scope of the access to Information Covenant, Twitter's alleged breach of its obligation and Musk's alleged misuse of it, all in respect of the number of fake Twitter accounts.

Andrew Gray (01:42): Over the period of March to April this year, Musk accumulated a 9.1% stake in Twitter. Whether he made securities law compliant early warning disclosure when he first hit the 5% level is a background issue in the litigation, and is reported to be the subject of securities regulatory inquiries as well. After accumulating a substantial position but before disclosing it, Musk asked for a board seat but then changed his mind and pivoted to a potential acquisition. At another point, Musk said his other plan for Twitter was to build a rival social media platform. A plan that later would put real pressure on the competitive aspects of his post-signing information requests. On April 14th, Musk announced in his SEC filing, and of course via his Twitter account, that he was making a proposal to acquire Twitter for $43 billion. A very significant premium over the pre-announcement market value of Twitter. He put the deal to Twitter on a first and best, take it or leave it basis, and together with the significant premium that indicated a strong desire to get a deal signed. The board of Twitter responded by forming a special committee and adopting a poison pill. A defense that effectively blocked Musk or another bidder from acquiring more than 15% of Twitter shares in a hostile, non-negotiated transaction. Ten days later, on April 25th, the poison pill was dropped and a deal was signed. Twitter, in its filed complaint against Musk describes the merger agreement as very seller-friendly. Including protections for Twitter such as an absence of a due diligence condition, no financing condition, a weak MAE definition and qualified representations. Additionally, the merger agreement contains a fairly typical access to information covenant and protections for Twitter from public disparagement. The purchase price was to be paid in part by Musk in cash through debt, partly secured by Musk's Tesla shares, and Musk also found some post-signing equity investors. Based on the timeline in Twitter's proxy statement and the fact that Musk's final proposal was not subject to the completion of due diligence, it's not clear that, in fact, he did any substantial diligence before entering into the merger agreement. It appears that shortly after signing, Musk had concerns about the deal. According to Twitter, that coincided with the drop in the market, including the price of Tesla shares. Also, according to Twitter, the escape route that Musk pursued was the access to information covenant. An increasingly burdensome requests for data about the number of fake Twitter accounts and the methodologies Twitter uses to estimate that. Musk also made requests for financial information and in reliance on a parallel Twitter obligation to assist Musk in obtaining his debt financing. Twitter's complaint, filed in the court in Delaware, paints a detailed picture of Musk's information requests. But at the time that was going on behind the scenes, observers saw some back and forth in public on this issue. With Musk now infamously posting a vulgar emoji in response to a Twitter post by its CEO about the fake accounts issue, and commenting in public on Twitter and elsewhere that he was having second thoughts about completing the deal and speculating about his rights to walk away. Twitter itself has said that it consistently remained committed to the transaction. This all culminated in Musk's report purporting to terminate the transaction on July 8th in a letter to Twitter filed with SCC.

Andrew Gray (05:36): The dispute highlights the way that different parts of an M&A contract agreement work together to allocate post-signing, pre-closing risk and the way that contractual obligations imposed on the target and bidder reflect that risk allocation. Unlike other COVID-busted deal cases, this one highlights the access to information covenant. Musk hasn't answered Twitter's complaint, but his July 8th SEC filing previews his defense. He said in that letter, principally, that Twitter breached its access to Information Covenant by failing to provide the fake account data requested, and that Musk was entitled to all the data he requested because it was, quote, related to the consummation of the transaction and contemplated by the agreement. That is, Twitter was obliged to provide access to the requested information. Musk said this alleged breach of the access to information covenant excuses him from having to complete the deal. And he also says, also in relation to the fake account data, that Twitter's continuous disclosure filings misrepresent the scale of Twitter's fake user problem, and that this may result in a mere material adverse effect. A further excuse from performing if that is made out. in the complaint it filed, Twitter anticipates these defenses. Apart from the factual question of whether Twitter satisfied Musk's fake account information requests, there's a real legal question of whether the access to Information Covenant is supposed to work in the way Musk alleges. Effectively providing post-signing, pre-closing due diligence in circumstances where the M&A contract itself doesn't have a due diligence condition. How does the interaction of the Information Access Covenant and the lack of a due diligence condition reflect risk allocation between Musk and Twitter? As to the misrepresentation point in the MAE, Twitter says that its representation about the accuracy of its public filings, including fake account disclosure, is qualified such that provides no exit route Musk, reflecting the view that Musk took the risk about the company's disclosure on the fake account issue.Twitter also says that Musk himself had breached the agreement, including the non-disparagement obligation. And this disentitles Musk from terminating the transaction. Twitter wants to force Musk to close, and it relies on what it calls a seller-friendly provision in the merger agreement, providing for a specific performance. There's therefore a question about the way that remedial risk was allocated. And Josh and Gillian are going to discuss the contested access covenant in this transaction, and the legal framework for remedying a busted M&A deal.