Like many of you I am watching the Twitter saga unfold.
In April it was announced that Twitter had agreed to sell itself to Elon Musk in roughly $44B deal.
On Friday July 8Th Musk announced he was pulling out of the agreement to purchase Twitter given the lack of clarity / information about how many of Twitters users are bots vs. legitimate people. Mr. Musk’s lawyer further clarified and states that this placed Twitter “in material breach of multiple provisions” of the original terms of the agreement.
Mr. Musk’s response was to tweet a series of photos of himself laughing and pointing out that in order to force him to complete the deal, Twitter will have to now publicly disclose the number of bot accounts in court.
On Tuesday July 12th Twitter filed a lawsuit in the Delaware Court of Chancery in an effort to force Mr. Musk to follow through and purchase the social media company.
Twitter said in its complaint that, “having mounted a public spectacle to put Twitter in play, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he — unlike every other party subject to Delaware contract law — is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away.”
Having served on a large number of public company boards (34 boards) and having been through my fair share of boardroom kerfuffle’s and crises, the question that comes to mind is: why doesn’t Twitter very rapidly try to negotiate and settle the dispute with Elon Musk?
Imagining you’re a Twitter director the question is what is the fastest way to settle and get to a resolution?
Historically, approximately a third of all public companies are being sued at any given time from a range of plaintiffs with a range of class action suits most don’t even hit the radar of the public and are handled by the GC and negotiated with a D&O policy.
The exposure for Twitter’s shareholders, advertising clients, and ongoing business concerns loom large if this dispute continues.
Shares of the social media platform were down 5% in early pre-market trading Monday July 11th. Shares were already well below April’s agreed-upon purchase price of $54.20-a-share purchase price, closing at $36.81 after Musk’s announcement to pull put of the purchase agreement.
It is hard to imagine that the plaintiffs are not scouring public statements made by Twitter to their shareholders in quarterly and analyst communications as well as public marketing collateral where they have stated they have some specified number of millions of customers.
It would seem to me that the plaintiffs’ bar will bring suit alleging that the number of customers Twitter says they have is not an accurate number.
Without a third-party independent verification source like a big four accounting firm how is it possible that Twitter can verify the number of active real customers vs software bots? Twitter has stated that they have approximately 5% software bots, this lacks verisimilitude. Mr. Musk believes the number of software bots is significantly higher.
A second set of commercial lawsuits that I anticipate Twitter may face are from their biggest advertising clients… Certainly Twitter will have told those clients they have an explicit number of millions of active users and now it seems dubious that that number would be accurate.
One can imagine a company that has spent heavily on advertising will want to claw back many years of advertising revenue that was based on inflated numbers.
However, there is a much more pressing issue: If the Delaware courts permit Mr. Musk to walk from the deal there could be foundational contract law issues. Mr. Musk signed the 75 page acquisition agreement and Twitter has no obligation to provide additional information post agreement. The specific commercial performance terms will likely be litigated in excruciating detail. But if the business community feels the Delaware courts are not holding up basic M&A contracts, might companies move to incorporate elsewhere? This case has the potential to set a precedent for companies walking away from M&A commitments.
It is hard to believe that if Twitter truly wanted to find out the number of users, they have they could not ascertain this. There are many standard pieces of enterprise software that have very close adjacent functionality that one could imagine using to help identify the number of real customers.
For example, if one looks at the full range of security software there are many companies specializing in identity management software. Additionally, there is a breadth of security and risk management software companies specializing in KYC for financial compliance as well as anti-money laundering software. Again, these are adjacent software’s that ascertain / verify identity.
Look at the breadth of marketing automation / marketing tech software out there that is in the broad commercial sector used to personalize and target all of us when we search for products on Google, Facebook, Amazon.
Again, standard adjacent and complementary technology that one could imagine could be applied to the challenge of identifying the actual number of real Twitter users.
One can only imagine that it may not be in Twitter strategic corporate interest to have a verifiable number of customers.
Twitter has already had activists in the stock in the past and as of now it does not appear there are any activists interested in acquiring a position in Twitter which is a market signal that it is unattractive and on a negative trajectory of diminishing value.
Once a situation like this occurs, and a company is “in play” often there is a white knight in the wings who will swoop in to acquire the company at a bargain price. Again, it is very telling that there does not appear to be any interest from the private equity or hedge fund side of things.
Uncertainty in a corporation is a bad thing. Your best employees leave. The corporation is unfocused and distracted. The value of the company is rapidly and negatively impacted.
One has to think about the Twitter boards concerns surrounding challenges of their business judgement in entering into a potentially risky deal with Mr. Musk and their confidence in the break up fee guarantee.
As public company directors we have to ask ourselves what would we do if we were sitting in the Twitter boardroom?
When we think of the complexities of the business judgments that Twitter board members need to make here is a little refresher:
- Role of the board is oversight on behalf of the shareholders, as a steward / fiduciary the health of the company on behalf of the investors and other stakeholders (customers, employees, communities, etc.)
- In looking at complex situations and crisis’s the board has to exercise “duty of care” which is to get objective external third-party facts data and information, so they make informed decisions.
- Additionally, the board has a “duty of loyalty” to put the interest of the shareholders first.
I recognize we have all embraced the concept of “stakeholder capitalism,” but as of today Delaware law and the Delaware Court of Chancery puts the interest of the shareholders first.
All of this comes together as the boards key deliverable or responsibility which is to make “business judgments” on the topics that impact the corporation both short and long term.
The goal being to maximize the value and health of the enterprise.
The Twitter board did not initially appear to want to sell to Mr. Musk, but board members have a fiduciary duty to get the best outcome for shareholders, and at a certain premium, the directors must exercise their business judgement to take the deal that balances return vs. risk.
Now the Twitter directors are faced with a stalled / disputed acquisition and complex commercial contract issues surrounding the interpretation of the acquisition contract and break up agreement.
With managements input and guidance, ultimately it is up to the boards business judgement to make the decision on what is the best business outcome for Twitters shareholders and stakeholders.
Clearly the Twitter directors are in the hot seat with the world watching and second guessing.
The boards’ role now is to chart the path and continuously iterate and make a large number of business decisions on the strategy and tactics of when to engage and negotiate with Mr. Musk vs letting this go the full way to a court decision.
You don’t want to risk destroying the future value of the enterprise by prolonging the dispute to get what might be a marginally small additional number of dollars if the court adjudicates in your favor vs reaching a settlement that gets you 90% of the way to a favorable economic result.
Most M&A disputes end in a negotiated settlement as it’s more expeditious and the board / management will want to balance the negative of having the enterprise distracted and losing value against getting the best monetary outcome for the shareholders while keeping sight of what is best for the overall enterprise.
The Twitter board now has the challenge of handling the most visible acquisition case of the decade and we will all learn from how this unfolds. Regardless of the outcome, the Twitter board now needs to have courage under fire and stand by their decisions as the world watches.