The Case Against Elon

Elon Musk
Photo: Drew Angerer/Getty Images
William D. Cohan
July 17, 2022

Elon now has a fine mess on his hands, and he’s not going to be able to easily extract himself from it anytime soon, unless, say, he agrees to pay some sum—oh, I don’t know, perhaps $5 billion—that few people have on their Bingo cards. That prediction, pulled out of thin air, is obviously more than the $1 billion walk-away fee that no longer seems viable, or in play legally, but less than what Elon might have to pay per a court order, should he be required to close the deal as he agreed to do on April 25. It’s the kind of number that might get this sad dispute resolved outside of court more quickly. 

My friend Scott Galloway suggested with merit on Pivot the other day that Elon will have to pay something more like $16 billion, the difference between the $44 billion he agreed to pay for Twitter and Twitter’s market value after the judgment in Delaware court goes against Elon, if it does, of course. (As a proxy for what that might be, I used Twitter’s roughly $28 billion market value these days.) Whatever the case may be, as I have written before, Elon is now operating from a position of weakness. He has signed a “seller friendly” merger agreement, and his buyer’s remorse over the alleged preponderance of bots on Twitter’s platform seems thin, despite what his lawyers wrote in a Friday filing that “false and spam accounts” are “fundamental to Twitter’s value.” 

Indeed, the depths of Elon’s legal troubles are clearly laid out in the complaint that Twitter’s attorneys at Wachtell Lipton and Potter Anderson & Corroon filed on July 12 in the Delaware Court of Chancery against Elon and the two holding companies he set up to acquire Twitter. Elon and his attorneys at Skadden and at Quinn Emanuel will have the opportunity to rebuke the Twitter filing, of course, which they started to do on Friday by rejecting Twitter’s request for a speedy trial. But in the meantime, the new allegations—including heretofore private emails and letters—about Elon’s behavior since he signed the merger agreement on April 25 is both pretty revelatory and pretty damning. What this suggests to me is another point that Galloway has been predicting lately—that the discovery process in this lawsuit could be ugly for Elon and raise the bar considerably for what it will take him to reach a settlement with Twitter to avoid a trial, or will make it harder for him to actually win if both sides let it go to a trial. (Hence, the $5 billion suggestion.)

Twitter’s central argument is that, some three months after signing the April 25 merger agreement, Elon now “refuses to honor his obligations to Twitter and its stockholders because the deal he signed no longer serves his personal interests.” The Twitter lawyers continued, “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.” 

The evidence against Elon, as asserted by Twitter’s attorneys, is compelling. He signed a merger agreement, after having had the opportunity to perform his due diligence, and promised financing “backed by airtight debt and equity commitments,” including $33.5 billion of his own equity. Never before has a single person committed so much equity to a single deal, one that astoundingly consisted of 76 percent equity and only 24 percent debt. I don’t know what advice Elon was getting from his bankers at Morgan Stanley, but I can’t imagine it was to propose that capital structure. 

Anyway, as the market started collapsing for technology companies at about the same time that Elon signed the merger agreement, he apparently started getting cold feet, and as the complaint alleges for the first time, started doing pretty much everything he could to thwart the deal’s progress as well as creating pretexts for how he might try to get out of the deal, as he did on July 8. Elon’s behavior, as shared in the complaint, between April 25 and July 8 is fascinating, and seems to be the opposite of the way someone who wanted to complete a deal would behave.

Twitter’s complaint argues that on May 6, the day after Elon announced that he had raised $7.1 billion of equity from an eclectic group of 19 investors, Morgan Stanley started asking for information from Twitter about fake accounts and bots. This request also coincided with the precipitous fall in the value of Tesla stock, the source of Elon’s tremendous wealth and of the collateral for the $12.5 billion margin loan that was part of the original capital structure of the deal at the time (but was later eliminated from it). Twitter’s argument is that Elon was merely looking for “a way out” of the deal. The subject of fake accounts and bots came up at an in-person meeting on May 6. On May 9, Morgan Stanley asked for more information about fake accounts and bots. “Nothing had changed about Twitter’s estimates concerning the prevalence of spam on the platform in the days since signing,” Twitter’s lawyers wrote. “Nonetheless, in the spirit of cooperation, Twitter responded on May 12 with data sets and written descriptions of its audience metrics and its process for sampling the prevalence of false or spam accounts.”

A day later, according to the same document, prior to another due diligence session to review the new bot data that Twitter had supplied, Elon tweeted that the “deal [is] temporarily on hold” until Twitter proved to him that fake accounts and bots were less than 5 percent of users. Two hours later, Elon tweeted that he was still “committed” to the deal. We can only imagine the firestorm that resulted from his “on hold” tweet that led to his “committed” tweet. The back and forth continued between Elon and Twitter, including with Parag Agrawal, the Twitter C.E.O., who tweeted a detailed explanation of the fake account situation and what Twitter does about them, followed by Elon’s adolescent response: tweeting a pile of shit emoji. (On Friday, Elon’s lawyers defended their client’s puerile behavior: “With the sense of humor of a bot, Twitter claims that Musk is damaging the company with tweets like a Chuck Norris meme and a poop emoji. Twitter ignores that Musk is its second largest shareholder with a far greater economic stake than the entire Twitter board.”)

On May 20, Elon’s lawyers requested “firehose” data from Twitter—a live feed of real-time data of people tweeting, retweeting, and liking—without explaining why they wanted the data. Twitter supplied it anyway. That was the motherlode of Twitter data, but still, apparently, not enough for Elon. The bizarre pas-de-deux between the two sides continued for weeks, with Elon asking for more and more data without explanation, Twitter fulfilling the requests, and then Elon claiming that Twitter failed to provide the information he wanted. “From the outset,” according to Twitter’s complaint, “defendants’ information requests were designed to try to tank the deal. Musk’s increasingly outlandish requests reflect not a genuine examination of Twitter’s processes but a litigation-driven campaign to try to create a record of non-cooperation on Twitter’s part. When Twitter nonetheless bent over backwards to address the increasingly burdensome requests, Musk resorted to false assertions that it had not.”

The saga of Bob Swan, the former C.E.O. of Intel who had been serving as an advisor to Elon, is particularly revealing. Swan had been working closely with Twitter executives to provide Elon financial information about Twitter to help him arrange for the $13 billion of debt financing that was already committed at the time of the signing of the merger agreement. That communication channel was working effectively. Suddenly though, on June 17, Elon demanded, through his lawyers, more financial information from Twitter, including both a “bottoms up” financial model from Twitter and a copy of the financial model that Goldman Sachs used to provide its fairness opinion to the Twitter board. 

Given that the senior debt financing for the deal had already been committed months earlier, these were very unusual requests, especially the request from Elon that Goldman share with him its financial model. (I’ve never heard of a buyer making such a request of a seller’s financial advisor.) Elon also began to lay the groundwork for the idea that his financing was not actually secured. In a June 21 interview with Bloomberg, he first suggested, bizarrely, that it was still an open question whether the debt portion of the deal for Twitter would “come together,” even though his banks had already committed to providing that financing. (Twitter kindly shared with Elon the fairness opinion Goldman presented to the board; I’ve never heard of that happening before, either.)  

On June 23, according to Twitter’s complaint, Elon texted Twitter management that he had fired Swan from the deal team. “[W]e are not on the same wavelength,” Elon wrote. He also made it sound like suddenly the committed debt financing was on shaky ground. When Twitter asked Elon who would be replacing Swan as someone Twitter management could communicate with, there was no response. When Goldman and JPMorgan Chase asked Morgan Stanley the same question, there was no response. When Twitter’s lawyers asked Elon for clarification about the status of the financing for the deal, as late as July 6—as was Twitter’s right under the merger agreement—Elon did not respond, other than texting Twitter management, “Your lawyers are using these conversations to cause trouble. That needs to stop.” A proposed replacement for Swan, Antonio Gracias, apparently never showed up, according to the document. Elon also ducked calls designed to get his approval of various employee retention plans and other personnel moves that Twitter believed were important to make.

There are many strange dynamics going on here. What prompted Musk’s pivot? Was it because he couldn’t raise the $33.5 billion of equity he promised to raise? Or was it because his banks were likely going to be on the hook for hundreds of millions of dollars in mark-to-market losses when they went to syndicate the debt they had committed to in a very different interest rate environment? Or was it because he was unable to negotiate a lower purchase price with Twitter than what he had agreed to on April 25? Possibly a combination of all three. 

The “specific performance” legal argument is a powerful one. But I can’t imagine the two sides are going to allow this chess match to get as far as a judgment in the court system. As I wrote last Sunday, Twitter is better off without Elon Musk and the sooner the better. As airtight as the merger agreement is—kudos to Simpson Thacher and Wilson Sonsini—Twitter is in no position to litigate with the world’s richest man. Life is too short for that. Better to find a compromise that will make Twitter better off and that won’t materially affect Elon. That’s where I came up with $5 billion. That’s a lot of money, but for Elon it’s the equivalent of a small penalty for his childish temper tantrum and might just give him a fighting chance to get back in business with Wall Street. He can’t run the two businesses he cares most about—SpaceX and Tesla—without those relationships, after all, so he’d better figure out a way to mend his bridges, and fast. 

That still leaves us with one helluva conundrum: to paraphrase The New York Times, what we have here is the prospect of a company that doesn’t want to be sold and a buyer that doesn’t want to buy it being forced by a court to complete a deal that neither side wants. If that doesn’t sound like 2022 to you, where have you been hiding?