Elon Musk's Acquisition of Twitter
Deal Overview
Acquirer: Elon Musk
Target: Twitter
Total transaction size: $44 billion
Closed date: October 27th, 2022
The takeover began with Musk’s official offer to acquire the company in April 2022,which was followed by months of back-and-forth between the two parties, with Musk attempting to escape the closure of the deal. This consisted of severe allegations on his behalf against Twitter, prompting a lawsuit against him for specific performance. This ultimately resulted in the litigation being halted when Musk finally committed to closing the deal in October.
Company Details: Acquirer – Elon Musk (X Holdings I and II)
Formally, the acquirers on the agreement are X Holdings I (‘Parent’) and X Holdings II (‘Purchaser’), both of which were created by Musk as part of the process for acquiring Twitter. Here, Holdings II was created to merge with Twitter, and Holdings I held the funds to finance the deal. Both companies’ assets were directly owned by Musk. After the deal, Twitter in merging with X Holdings II became ‘X Corp’, the subsidiary of X Holdings I which since then has become X Holdings Corp. However, X Corp isn’t owed wholly by Musk, although he owns the majority of it. Given the involvement of many other investors in Musk’s funding efforts for the acquisition, several other investors received equity stakes, such as Oracle’s co-founder Larry Ellison and Binance.
Elon Musk has cofounded a myriad of companies, most notably Tesla, SpaceX and the AI startup xAI. He is also regarded as one of the wealthiest people in the world, having launched several other ventures such as Neuralink and Boring Co. He is of mass significance in social, political and legal discourse. He has often been on the receiving end of lawsuits. These include Tesla’s participation in an alleged copyright infringement of a film, as well as the validity of his entitlement to a massive compensation package
Company Details: Target – Twitter Inc
Twitter was created in 2006, originally being a side project. It then received Series A funding by a Ventures company, preceding the surge of the platform’s popularity. It gained traction as a crucial platform and network for public discourse during the Arab Spring (2010-2011), with protestors utilising it to organise their campaigns and share live updates. The platform went public in 2013 through an Initial Public Offering, raising $1.8 billion. It then considerably began to struggle against other competitors such as Google and Facebook.
Legal Contentions
Musk’s publicly shared intention to put a hold on the deal after Twitter’s acceptance of his offer surrounded claims of their false disclosure of the proportion of spam accounts and bots on the platform, namely it being less than 5%. He deemed this a ‘materially inaccurate representation’. This in turn prompted Twitter to file a lawsuit at the Delaware Court of Chancery for the grant of Musk’s specific performance to complete the deal in accordance with the agreement. This led to several varying legal counterclaims being raised by Musk, all unified in their efforts to enable his escape from the deal, if not a renegotiation of the purchase price. The most contentious and focal claims are discussed below.
His first counterclaim stipulated that Twitter had committed fraud in that it had not only falsely disclosed the spam account figure but had also done so knowing that the real statistic was higher. This, if it had succeeded would have prompted his undoubted escape from the deal. Further, the coinciding whistleblower claim that had occurred at the time only purported to substantiate Musk’s fraud allegations. Particularly Zatko’s allegation of ‘egregious deficiencies’ related to privacy and digital security within Twitter could support Musk’s argument, although it was not directly related.
Musk’s second claim surrounded material adverse effect (MAE). If this occurs between signing and closing, the buyer can walk away subject to some conditions. Musk argued that the false figure could reasonably be expected to result in a material adverse effect on the future business of Twitter which he was to acquire and hence, he should be entitled to walk out. This argument was the result of the buyer-friendly MAE clause within their agreement. Disputes surrounding MAEs are notoriously the most time-intensive and complex corporate litigations, providing a disincentive for trial and carrying the purpose of enabling a renegotiation of the purchase price. However, Twitter’s refusal to renegotiate the price and Musk’s team’s own disability to provide a contrary figure to prove Twitter’s disclosure false meant that the claim didn’t succeed entirely. Indeed, this was despite Twitter’s cooperation in giving Musk’s team access to their data stream, ‘the firehose’, which only further undermined the premise of his claims.
Ultimately, the initial verdict was in favour of Twitter which consequently resulted in Musk’s commitment to closing the acquisition as opposed to moving towards trial.
Overall, the legal contentions are emblematic of the degree to which contractual incompleteness and uncertainty were exacerbated here due to the lack of tight deal protections for the selling side. A crucial takeaway from the legal structure of the deal itself is to tailor its terms to the entity or individual acquiring it as opposed to adhering to standard terms. Indeed, this takeover followed the standard private equity deal model which is conventionally regarded as being more complex and inherently less certain in terms of closure. The only significant difference was the lower termination fee if financing fell through, which here was only about 2.3% of transaction value, compared to an average of 5% in standard private equity deals. Given the overvaluation of the purchase price and hence the higher stakes, tailoring the termination fee accordingly and raising it could have avoided the delay and the initiation of litigation. More generally, the need for visibility and assessing the opposing party in any such transaction was further exemplified by this takeover given that Musk’s reckless approach to deals was already apparent in his preceding failed attempt at a management buy-out for Tesla. This should have been heeded more closely by Twitter as it could have meant tighter deal protections in the agreement itself, for instance via the absence of an MAE clause altogether.
Alternatively, the litigation of the MAE claim in Delaware was dispositive, meaning that this claim couldn’t be litigated by the debt financiers if the overarching litigation between Musk and Twitter was decided in favour of Twitter. This was due to the alignment of the financial agreements and documents with the acquisition agreement itself. This meant Musk was pushed to allege a breach of the agreement itself which proved to be a more speculative and high-risk feat. This legal element of the agreement can provide a strategic lesson to any future sellers.
Impact and Future Implications
Historically, MAE disputes have been resolved in favour of the buyer as, in most cases, the deal is either terminated or completed at a reduced purchase price. However, the Twitter-Musk dispute set an exceptional, outlier precedent. It was completed at the initial price without litigation and was the only transaction that finalised at the full price without the litigation enforcing an order for the buyer to complete.
Ultimately, this precedent has raised the anticipation of more MAE claims at trial in the future as it has prompted sellers to be more open to risking litigation. Nonetheless, given the undoubted overvaluation of the original purchase price for Twitter, arguably this was a risk worth pursuing in hindsight. This may not chime true for standard acquisition cases given the exceptional nature and magnitude of this deal, although it does emphasise the need for sellers to proactively guarantee their own protection through negotiating certain terms as standard clauses tend to remain more buyer-friendly in nature.
It has also further emphasised the importance of the due diligence phase of any deal. Musk’s lack of persistence to conduct due diligence on technical formalities of the deal enabled him to subsequently create speculation and delay the closure. This ultimately proved fatal for Twitter who felt a massive blow to their business before closure, with the arbitrage spread being over 20% before the anticipated trial. Hence, the takeover has more broadly emphasised the continued importance due diligence holds in any given deal, especially as a mechanism not simply for the buyer to balance out their financial risks but as proactive protection from any subsequent hefty legal claims against sellers, especially of such mass social standing like Twitter.
References
Conger, Kate, and Lauren Hirsch. “Twitter Sues Musk after He Tries Backing out of $44 Billion Deal.” The New York Times, 12 July 2022, www.nytimes.com/2022/07/12/technology/twitter-lawsuit-musk-acquisition.html.
Hwang, Cathy, and Steven Davidoff Solomon. Musk & Twitter: A Case Study in Private Equity and Contractual Certainty. 2024, papers.ssrn.com/sol3/papers.cfm?abstract_id=5008973, https://doi.org/10.2139/ssrn.5008973.
Murphy, Hannah. “X Says It Is Worth $19bn One Year after Elon Musk’s $44bn Acquisition.” Financial Times, 30 Oct. 2023, www.ft.com/content/56cc3153-4862-4a3c-bc23-404a0810ab94.
Murphy, Hannah, and Ortenca Aliaj. “Twitter Sues to Force Elon Musk to Complete $44bn Deal.” Financial Times, 12 July 2022, www.ft.com/content/b99b98ed-9952-4b4f-ba46-24f863a33af2.
Subramanian, Guhan. “Musk – Twitter: A Case Study of the Merger Agreement.” PON - Program on Negotiation at Harvard Law School, 15 Sept. 2022, www.pon.harvard.edu/free-videos/musk-twitter-a-case-study-of-the-merger-agreement/.
Zahn, Max. “A Timeline of Elon Musk’s Tumultuous Twitter Acquisition Attempt.” ABC News, 11 Nov. 2022, abcnews.go.com/Business/timeline-elon-musks-tumultuous-twitter-acquisition-attempt/story?id=86611191.