As has appeared inevitable for some time, Elon Musk formally attempted to terminate his merger agreement with Twitter on Friday. Here’s the termination letter from Musk’s lawyers. There’s already been a lot of good stuff written about the legal issues at play here (See this piece from Matt Levine and this one from Case Western law prof. Anat Alon-Beck), so I’m not going to reinvent the wheel. I just have a couple of observations.
– First, overall, the reasons Musk set forth allegedly giving him grounds to terminate don’t seem very compelling. I don’t think a court is going to be very interested in interpreting the access rights granted to Musk under Section 6.4 of the merger agreement, which are intended to allow him to obtain information “for any reasonable business purpose related to the consummation of the transactions contemplated by this Agreement”, to provide an open door to conduct the kind of due diligence investigation that he should’ve conducted prior to signing the deal.
– Second, it strikes me that the one allegation that might have some legs under the right alignment of planets is this one, which challenges Twitter’s compliance with the ordinary course covenant in Section 6.1 of the agreement:
Finally, Twitter also did not comply with its obligations under Section 6.1 of the Merger Agreement to seek and obtain consent before deviating from its obligation to conduct its business in the ordinary course and “preserve substantially intact the material components of its current business organization.”
Allegedly, Twitter’s conduct in firing a couple of high-ranking employees, as well as its announcement on July 7 that it was laying off a third of its talent acquisition team, implicates the ordinary course provision. Musk’s lawyers also point out that Twitter has instituted a general hiring freeze and – demonstrating that Musk’s side of the table isn’t lacking in chutzpah – contend that recent post-Musk deal resignations also resulted in a material breach of this covenant.
I think that what makes the final allegation a little more interesting than the first is that it could potentially give a court pause about whether Twitter acted reasonably, given its obligations under the ordinary course covenant, in taking some of these actions with respect to senior employees without seeking Musk’s consent. It still seems like a stretch to me, but allegations of breaches of the ordinary course covenant in the AB Stable case are what got traction in the Delaware courts,
Do I think this argument based on non-compliance with the ordinary course covenant is a winner? Nope. Twitter will undoubtedly point out that Musk has done nothing but sow chaos and play fast and loose with some of his own obligations under the merger agreement nearly since the day he signed it. Frankly, I don’t think that kind of conduct is going to make the Chancery Court terribly sympathetic to arguments based on an alleged covenant foot fault by Twitter.
What’s more interesting to me is, if this does end up with the Chancery Court issuing a ruling holding that Musk isn’t entitled to terminate, what kind of remedy might it fashion? There’s at least the chance that, having sown the wind, Elon Musk just might reap the whirlwind.
– John Jenkins