August 15, 2022
August 15, 2022
All public company investors, executives, and directors as well as the bankers and lawyers that represent them should unite in support of the Twitter board’s enforcement of the merger agreement with Elon Musk. If Musk prevails in his thinly veiled attempt to obfuscate his buyer’s remorse and renege on a legally binding contract, the ensuing chaos will not only undermine Twitter but all companies and their shareholders that rely on the integrity of our corporate governance, legal, and capital markets ecosystem.
The only relevant issue here is whether the merger agreement that Twitter and Musk entered into on Apr. 22, 2022, is enforceable or whether Musk has a valid argument to terminate the agreement.
There have been a lot of distractions surrounding this transaction and Musk’s attempts to terminate the merger agreement, so let’s be clear, this is not about:
Public company boards have fiduciary obligations to their companies and shareholders and these obligations are at their highest level of sensitivity when considering an agreement for the sale of the company. Some obvious reasons for this heightened sensitivity are that a sale transaction can end the public company life, cap the upside, and set a specific price that is open to criticism from shareholders and plaintiffs. Another important reason that deserves more attention is that a typical public company merger or acquisition agreement puts significant constraints on how the to-be-acquired company can operate between signing and closing, and if the merger is not consummated, the company will likely be materially harmed as a result of these constraints. For these reasons, public company boards are well advised to minimize the risks of transactions failing to close by ensuring the terms of the merger agreement eliminate virtually all contingencies within the buyer’s control.
Since Musk wanted to move quickly to a definitive merger agreement that preempted Twitter’s opportunity to run a full competitive sale process, Musk offered—and the Twitter board agreed to—a seller-protective agreement that effectively accepted Twitter “as is” by waiving any opportunity for due diligence.
Unfortunately for Musk, the economy and markets weakened after he signed the agreement, and Tesla shareholders were particularly unhappy with Musk’s decision to buy Twitter and sell a large portion of his Tesla shares to fund the transaction. Musk apparently changed his mind after signing the agreement, and on July 8, he submitted a letter of termination based on arguments that he believes the amount of spam bots on Twitter is greater than publicly disclosed. Musk and everyone else knew about spam bots before he signed the agreement; he could have asked to perform due diligence on that before signing, but explicitly waived that right. The fact that Musk is complaining about spam bots after the fact seems to be an obvious pretext to extricate himself from an agreement that he no longer likes.
If Musk successfully terminates the agreement, it would not only leave Twitter in shambles, but it would set a precedent that essentially says that a definitive merger agreement is not binding after all and is more like an option in which the buyer can close the deal if he or she wants to, or walk away if it suits his or her evolving personal interests. If this precedent is established, it would send a chill through all corporate mergers and acquisitions as public company boards could no longer be confident that a definitive merger agreement will lead to a closed transaction on the agreed-upon terms if the buyer changes his or her mind.
The Twitter board has commenced litigation in the Delaware Court of Chancery, persuasively refuting the arguments Musk has made for termination and seeking to compel Musk to close on the agreed-upon terms of $54.20 per share. This is the right thing to do. Twitter should not accept anything less. The fact that Musk has buyer’s remorse for a transaction that he initiated cannot give him license to damage the company and its stakeholders, and then walk away.
Most importantly, Twitter’s board needs to prevail in the Delaware Court of Chancery to demonstrate that merger agreements are, in fact, legally enforceable contracts, and no buyer can renege on the commitment to consummate a transaction simply because their interests have changed. Nothing less than the viability of the entire ecosystem that corporate executives, directors, investors, and their attorneys and bankers rely upon depends on it.
Kenneth Traub is the managing partner of Delta Value Advisors, an investment management and consulting firm. Traub has served as CEO, chair, independent director, and active investor in numerous public companies.
Editor’s Note: Traub is a Twitter shareholder.
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