Why did Elon Musk agree to buy Twitter again instead of continuing to argue his claims that Twitter violated the merger agreement by lying about bots? There are a few answers, but “the biggest one of all is that he’s almost certain to lose [in Delaware Court of Chancery]. And of course, if he loses, he has to do exactly what he’s just agreed to do, which is close the deal at the original price,” law professor Robert Miller told Ars in a phone interview yesterday.
Miller is the F. Arnold Daum chair in corporate finance and law at the University of Iowa College of Law. “The Delaware Supreme Court and the Delaware Court of Chancery have cited Professor Miller’s articles on material adverse effects, an issue the Court of Chancery has described as ‘one of the most difficult issues under Delaware law,’ more than forty times,” his University of Iowa bio says. Musk’s defense against Twitter’s lawsuit depended heavily on whether he could prove that Twitter suffered a material adverse effect.
Musk tried to get out of the $44 billion deal by claiming that Twitter lied in its estimate that fewer than 5 percent of its monetizable daily active users (mDAU) are spam or fake. But his claims seemed to have no solid proof, and with the scheduled trial less than two weeks away, Miller says Musk probably finally realized his case likely isn’t a winner.
“By this point, I think his lawyers have all the documents that they’re going to get from Twitter, and it’s probably pretty clear that there’s nothing to that claim,” Miller said. He also predicted that Musk would lose over a week ago, when it seemed the October 17 trial would begin as scheduled.
In a letter to Twitter Monday, days before he was scheduled for a deposition, Musk offered to complete the deal “provided that the Delaware Chancery Court enter an immediate stay of the action… and adjourn the trial and all other proceedings related thereto pending such closing or further order of the Court.” A stay would not prevent Twitter from resuming his lawsuit against Musk if he pulls out of the deal again.
Musk’s fraud argument was implausible
If Musk actually proved what he alleged, he’d be “home free” and wouldn’t even have to pay the $1 billion merger breakup fee, Miller said. But Miller called Musk’s central implausible allegation.
“If Twitter had been engaged in a gigantic fraud about mDAU—in other words, if they really knew there was a better way to measure fake accounts than the process they were using but they chose to use this one anyway because it produced the numbers they liked, but the real process that they themselves knew to be better came back with a number like 15 percent—if he could prove that, he’d be in great shape,” Miller said.
But that scenario would be “comparable to an Enron-level fraud,” a “massive securities fraud” in which “anybody who was involved in the fraud and sold Twitter shares that they received as compensation during the fraud period would be guilty of criminal insider trading,” Miller said. That “makes it inherently implausible. Things like that do occasionally happen, but they’re extremely rare,” he said.
Miller has given presentations on the Musk/Twitter case to the New York City Bar Association’s committee on mergers and acquisitions multiple times, including yesterday morning. He also used to be a lawyer at Wachtell, Lipton, Rosen & Katz, which is representing Twitter against Musk and previously represented Musk and Tesla in other matters.
Experts who spoke to the Financial Times agreed that Musk’s side must have realized during discovery that the case was too weak to go to trial. “I think we were very close to the end of the discovery, and Musk’s lawyers did not get what they wanted,” Stefano Bonini, a corporate governance expert at Stevens Institute of Technology, told FT. “The judge has not given that many concessions to Elon’s team. They filed requests for an unreasonable amount of data, and the judge ruled that a lot of what they asked for was unnecessary and genuinely confidential.”
In a tweet yesterday, Musk wrote, “Buying Twitter is an accelerant to creating X, the everything app.”