Center for Israeli Legal Studies at Columbia Law School
The proposed and disputed Musk-Twitter transaction is perhaps the most eventful and contentious acquisition in modern times.
Fortunately, one of the brightest legal minds dissects the terms, twists and turns, and possible outcomes of this gripping saga.
Professor Goshen speaks about Twitter’s poison pill and fiduciary duties as well as the use of breakup fees, hell-or-high water provisions, performance clauses, waiving of financing contingencies and irreparable harm.
On this podcast we tackle contentious issues such as why Twitter might allow Mr. Musk to disparage Twitter on Twitter and what the consequences of such disparagement might be to Mr. Musk. We discuss whether the Musk team errored in waiving normal due diligence opportunities and in not hedging against the risk of Twitter’s shares falling precipitously.
Sparks really flew when we got to issues of Twitter’s reporting of the incidence of bots on its platform. How can bots be detected and counted? Are Twitter’s representations of the incidence of bots credible? If not, is the difference material? If the incidence of bots is much higher than Twitter reported, can such lapse trigger a material adverse event? Would that development extricate Mr. Musk from the deal?
No transactions lawyer or dealmaker should miss this podcast.
Professor Zohar Goshen, Director of the Center for Israeli Legal Studies, Columbia Law School
As the Jerome L. Greene Professor of Transactional Law and Director of the Center for Israeli Legal Studies at Columbia Law School
Professor Goshen’s articles on corporate law and securities regulation are frequently named among the Top Ten Best Articles of the year by Corporate Practice Commentator.
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00:00:59 – A poison pill is a very effective tool to prevent someone from buying more and more shares without paying a premium when they want to get control.
a poison pill is something you insert into the bills of the corporation, which basically says, we set a threshold normally, but 15%. And if you are going to cross that threshold without the board approval, then what’s going to happen? We are going to issue to all other shareholders rights to buy additional shares at half the price, which the result of which would be major economic dilution of the ownership value of the person who cross the threshold. So it’s a very effective tool to prevent someone buying more and more shares without paying premium when they want to get control.
00:09:48 – Elon Musk wanted to back out of the deal.
Okay, so shortly after, Elon Musk made the offer, and Twitter hired the investment banks to see if there were any other opportunities to receive a similar or higher price. And that didn’t happen.
They couldn’t find another buyer. Elon Musk wanted to back out of the deal.
Maybe it was because of Tesla stock declining in value. He lost maybe $100 million of value, 100 billion. Right. Okay. The financing he put in place, that still stayed in place, is that correct? More or less, yes..
00:28:23 – For example, if you request something from a regulator and the regulator says, no, you are not allowed to buy the corporation.
I don’t try to get out of the deal, not because of finance. And his lawyer, in the letter that he sent us, but a week ago on the 8 July, is mentioning three different reasons why they think they are allowed to step out of the deal.
In any case, for your question, the breakup fee, the reverse breakup fee, the $1 billion is not conditioned on financing, and it will be triggered.
For example, if you request something from a regulator and the regulator says, no, you are not allowed to buy the corporation. In this case, since it’s not in your hand, you can go out of the deal and you can pay the $1 billion termination fee. But these are the type of circumstances in which you will be able to exit and pay the breakup fee.
But as far as reader is concerned, in the contract, they have a right for specific performance, which he agreed that they are allowed to pursue. It is their choice whether to let him go and ask for $1 billion or to go with specific performance, given that they don’t think that $1 billion is sufficient compensation. So whatever happened, they are not pursuing this truth.
00:34:47 – Twitter is basically saying that Elon Musk is misbehaving.
Twitter is basically saying that Elon Musk is misbehaving, maybe has bad character, they’re saying negative things about him, or at least that’s the tone of narrative that is coming out of Twitter.
So could it be argued that the board of Twitter is breaching their fiduciary duty by trying to put the company in the hands of somebody who is damaging the value of the company? When the employees that have stock and options invested, stock coming to them, the value logically should decline if the owner of the company is a bad person, damaging the value of Twitter.
So if I worked there and I have shares after the deal goes through, logic would be that the value of my shares would fall.
So is the responsibility of the board to the shareholders only up to the date of the transaction, or are they supposed to look a little bit forward and try to predict how the employee shareholders will fare if an unfit person owns the company?
00:40:16 – If a bank says Elon Musk is committing wire fraud, and every day the bank goes along with the wire fraud, it seems contradictory to allow that to happen on their own platform.
But the argument twitter is saying that Elon Musk’s disparagement of Twitter has led to a depreciation of value. It may be demoralizing employees. It may be scaring away advertisers. It may for users from using Twitter if they think that’s true.
Most of the so called disparagement from Elon Musk is going through Twitter. So why don’t they just block him like they blocked so many other people, including the President of the United States?
Tens or hundreds of thousands of people that don’t agree with Twitter get blocked all the time. It’s like if a bank says Elon Musk is committing wire fraud, and every day the bank goes along with the wire fraud, it seems contradictory to allow that to happen on their own platform.
00:48:46 – Elon Musk in the complaint did not provide the required consent to do that, which makes more employees leave the company without being able to keep them in.
Twitter is suffering on many dimensions. They are suffering because of the reputation damage with advertisers. They are suffering because of many employees living in the corporation.
Some of them are important. In fact, they wanted to have some program to keep crucial employees in the company. And Elon Musk in the complaint did not provide the required consent to do that, which makes more employees leave the company without being able to keep them in.
So all of this aspect of that, especially when you remember Elon Musk said that he has three options. One is to be on the board. One is to acquire Twitter. And one, people don’t remember that is to create a competing company.
So when you take all that into account, this would be very damaging for Twitter.
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