Elon Musk and the order of specific performance
Price at posting: $39.52
Twitter Inc (NYSE:TWTR)
The percentage of users on Twitter that are bots is seemingly dwarfed by the percentage of users on Twitter that are experts in Delaware corporate law. It seems unnecessary then that a Judge has set an October trial date to hear arguments as to whether the $US44 billion deal should go ahead. The armchair experts have already ruled in favour of Twitter.
Elon Musk informed Twitter that he was walking away from the deal for the purported reason that Twitter has many more spam accounts than its stated ‘less than 5%’ estimate. On 12 July, Twitter sued Elon Musk in a Delaware court to make good on the deal.
The merger agreement (the merger being between Twitter and an acquisition shell) included a clause that specified a $US1 billion break fee. If Twitter are successful in court, the judge may choose to order damages in line with this figure (or another figure) but may also order Musk to consummate the deal – a remedy known as specific performance.
Specific performance is rare but there is precedent for the Delaware courts going down this path.
Chicken producer seeks eggs-it
In 2000, Tyson Foods was a chicken giant intent on expanding into beef and pork to ‘put the company at centre of nearly every dinner plate.’ IBP was the USA’s largest beef distributor and second largest pork distributor and so Tyson saw IBP as an attractive target.
Prior to making its final offer, Tyson was alerted to serious problems at an IBP subsidiary, DFG, which had been the victim of accounting improprieties to the tune of over $30 million in charges to earnings and which was also the subject of an active asset impairment study.
Tyson’s desire to acquire IBP was such that it raised its offer a number of times even after learning of the problems at DFG.
Then, a severe winter hurt both beef and chicken supplies and Tyson and IBP’s businesses suffered as a result. Tyson Foods became nervous about the IBP deal and began to stall for time. Tyson still believed that the deal made strategic sense but wanted to find a way to consummate the deal at a lower price given the shocks to animal protein markets.
Tyson sought to rescind the deal claiming that they had been fraudulently induced into entering the merger agreement pointing to the accounting improprieties at DFG. IBP sued and the case went to the Delaware Courts. In the Judge’s view, Tyson Foods was clearly still interested in purchasing IBP but wanted “to get its original purchase price back and then buy IBP off the day-old goods table.” The Judge ordered a remedy of specific performance.
How will this impact on the Twitter transaction?
I won’t pretend that the 53% grade I received for corporate law has endowed me with the ability to predict the outcome of the Twitter case but there are some notable differences with the IBP case that may lead to a different outcome.
Firstly, DFG was a very small part of IBP’s business and the merger agreement permitted IBP to recognise unlimited additional liabilities relating to the accounting improprieties at DFG. In contrast, the true percentage of spam user accounts is of great importance to Twitter’s business. Advertisers pay Twitter based on reach. If ads reach fewer genuine users than first thought, advertising revenue is likely to sharply fall.
Secondly, Tyson conducted a very comprehensive due diligence process. It retained Millbank, Tweed, Hadley McCoy as its primary legal advisor, Merrill Lynch Co. as its primary financial advisor, and Ernst and Young as its accountants and so the judge found that it did not rely solely on IBP’s projections. Musk on the other hand appears to have done almost no due diligence and so may have relied entirely on Twitter’s own estimate of bots. It is somewhat counterintuitive but if the estimate turns out to be wildly off, it could be argued that Musk was fraudulently induced to enter the merger agreement as he didn’t conduct his own due diligence and so relied solely on Twitter’s estimates.
On balance, Twitter does appear to have the upper hand and there is still time for the parties to reach an out of court settlement. If the case is heard though, the acquisition of the digital bird is likely to be determined based on the case involving the real-world ones.