BY: Noah Adams, RBFL Student Editor
In April of 2022, Twitter accepted a $44 billion takeover bid from Elon Musk, which would see the Tesla and SpaceX CEO take the social media company private. Musk, a self-proclaimed free-speech absolutist, declared that his acquisition of Twitter was essential to protect the virtual town square from harmful censorship. However, by May, Musk had announced that the deal was on hold, and was engaged in an online feces-flinging contest with Twitter’s then-CEO Parag Agrawal, replying with a poop emoji to Agrawal’s comments about the deal (on Twitter, of course). In July, Twitter filed suit against Musk in the Delaware Court of Chancery seeking enforcement of the agreement. Ultimately, Musk would decide to go ahead with the purchase for the full $44 billion, but not without some resistance first.
Musk initially sought to get out of the agreement on a longshot material adverse effect (“MAE”) theory. Corporate mergers and acquisitions are typically subject to MAE clauses that allow the buyer to walk away from the deal if something occurs between signing and closing that materially impacts the value of the target company. These clauses generally do not define “material,” so the question of what constitutes a material effect usually falls to the Delaware courts.
Historically, buyers have been largely unsuccessful at arguing MAEs in the Delaware Court of Chancery, where Twitter brought the suit against Musk seeking enforcement of the agreement. In fact, a MAE argument had succeeded just once before, in Akorn, Inc. v. Fresenius Kabi AG, and in that case the target company had suffered a tremendous downturn in performance, resulting in a year-over-year earnings decrease of 51%. However, Twitter suffered no such downturn and Musk’s argument instead hinged on Twitter’s alleged misrepresentation of the number of spambots, or fake user accounts, on the Twitter platform.
Observers at the outset generally agreed that Musk faced a steep uphill battle, but the filing of a whistleblower report by former Twitter executive Peiter Zatko offered Musk new arguments to bolster his case. The whistleblower report alleged that Twitter was not in compliance with a 2011 Federal Trade Commission Consent Order, which could mean remediation costs (in fines and in achieving compliance) of hundreds of millions or billions of dollars for Twitter; Twitter was already fined $150 million in 2019 for violations occurring in the preceding six years. However, the issue of remediation costs’ materiality is decided on a reasonable acquirer standard. Had the case gone to trial, the Delaware Court of Chancery would have been tasked with determining what remediation costs a reasonable acquirer would consider to be material in a case where the acquirer publicly stated that he was buying the target company for “the future of civilization,” and that he did not “care about the economics at all.”
Mercifully, for Chancellor Kathaleen McCormick, the judge presiding over the case, the court managed to escape that responsibility when Musk decided that he would buy Twitter for the full amount after all. McCormick’s no-nonsense approach to the case, limiting discovery and denying Musk’s motions for a longer trial at a later date likely informed Musk’s decision to go ahead with the deal.
The Twitter v. Musk ordeal highlights the difficulty of establishing a MAE and will serve as a case study on the importance of conducting diligence before making an offer. The Delaware Court of Chancery has little interest in creative legal arguments from acquiring parties suffering from buyer’s remorse.
Jonathan Vanian, Elon Musk Has Been Expressing Buyer’s Remorse Over Twitter for Months, CNBC (July 8, 2002, 8:21 P.M.) https://perma.cc/82KY-NJFF.
Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL, 2018 WL 4719347, (Del. Ch. 2018) aff’d, 198 A.3d 724 (Del. 2018) (unpublished table decision).
Tom Hals, Analysis: Twitter Has Legal Edge in Deal Dispute with Musk, Reuters: Technology (July 11, 2022, 6:29 AM), https://perma.cc/Y32X-UAN7.
Mia Sato, Buying Twitter ‘Is Not a Way to Make Money,’ Says Musk in TED Interview, The Verge (Apr. 14, 2022, 1:32 P.M.), https://perma.cc/66SZ-K3YQ.
Marcy Gordon, Musk Twitter Turnaround Reflects Legal Changes, Associated Press, (Oct. 5 2022), https://perma.cc/BN38-2NP5.