Why Elon Musk agree to buy Twitter instead of continuing to argue its claims that Twitter violated the merger agreement by lying about bots? There are a few answers, but “the most important of all is that it is almost certain to lose [in Delaware Court of Chancery]. And of course, if he loses, he has to do exactly what he just agreed to, which is close the deal at the original price,” law professor Robert Miller told Ars in a phone interview yesterday.
Miller holds the F. Arnold Daum Chair in Corporate Finance and Law at the University of Iowa School of Law. “The Delaware Supreme Court and the Delaware Court of Chancery have cited Professor Miller’s papers on material adverse effects more than forty times, an issue the Court of Chancery has described as “one of the most difficult under Delaware law”, “his University of Iowa Biography said. Musk’s defense against Twitter’s lawsuit hinged heavily on his ability to 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 less than 5% of its monetizable daily active users (mDAUs) were spam or fake. But his claims seemed to have no solid evidence, and with the trial scheduled in less than two weeks, Miller says Musk probably finally realized his case probably wasn’t winning.
“At this point, I think his attorneys have all the documents they’re going to get from Twitter, and it’s probably pretty clear there’s nothing to that claim,” Miller said. He also has predicted which Musk would lose more than a week ago, when it looked like the Oct. 17 trial would begin as scheduled.
In a letter to Twitter on Monday, days before his deposition, Musk offered to close the deal “provided that the Delaware Chancery Court forthwith stays the action … and adjourns the trial and all other proceedings in connection therewith pending such closing or further order of the Court.” A stay would not prevent Twitter from resuming its lawsuit against Musk if he backed out of the deal again.
Musk’s cheating argument was implausible
If Musk actually proves what he claims, he would be “home free” and not even have to pay the billion-dollar merger break-up fee, Miller said. But Miller called Musk’s central allegation implausible.
“If Twitter had engaged in a gigantic mDAU fraud, in other words, if they really knew there was a better way to measure fake accounts than the process they were using, but they still chose to use this one because it produced the numbers they liked, but the real process that they themselves knew was better came back with a number like 15% – if he could prove it , he would be in great shape,” Miller said.
But this scenario would be “comparable to an Enron-level fraud”, a “massive stock market fraud” in which “anyone involved in the fraud who sold Twitter shares that they received as compensation during the period of the fraud would be guilty of ‘criminal insider trading,” Miller said. That “makes it inherently implausible. Things like that happen sometimes, but they are extremely rare,” he said.
Miller has made presentations on the Musk/Twitter case to the New York Bar Association’s committee on mergers and acquisitions on several occasions, including yesterday morning. He was also an attorney at Wachtell, Lipton, Rosen & Katz, which represents Twitter against Musk and previously represented Musk and Tesla in other topics.
Experts who spoke to the Financial Times agreed that Musk’s side must have realized upon discovery that the case was too weak to go to trial. “I think we were very close to the end of discovery, and Musk’s lawyers didn’t get what they wanted,” Stefano Bonini, a corporate governance expert at the Stevens Institute of Technology, told FT. . “The judge didn’t give Elon’s team that many concessions. They filed requests for an unreasonable amount of data, and the judge ruled that much of what they were asking for was unnecessary and truly confidential.”
In a Tweeter Yesterday, Musk wrote: “The purchase of Twitter is an accelerator for the creation of X, the universal app.”