July 8, 2022
TWTR-Musk – OG Risk Arb’s Initial Comments on Musk’s Termination
Letter
TWTR-Musk – OG Risk Arb initial comments on Musk’s termination letter. As
a general matter, we agree with TWTR’s PR responding to Musk’s letter,
TWTR should be confident they will prevail in Delaware Chancery Court
where they plan on pursuing legal action to enforce the merger agreement.
Among other things, we note the following:
• Musk’s termination letter is weak and premature. The
letter makes essentially five arguments in favor of termination:
(1) failure to provide after repeated requests over a period of
time longer than the 30 day cure period requested information
regarding the percentage of bot accounts pursuant to section
6.4; (2) failure to provide information regarding TWTR’s financial
condition pursuant to 6.11 needed for the financing; (3) MAC
level misrepresentation of the percentage of bots in TWTR’s SEC
filings; (4) MAC based on deterioration of TWTR fundamental
performance; and (5) ordinary course violation due to TWTR
firing certain employees without prior consent pursuant to
section 6.1.
o Musk’s information request termination grounds (1
and 2 above) are contrary to the express language of
the merger agreement and would essentially create
a universal out from nearly any merger contract --
Musk attempts to manufacture grounds for termination
with respect to (1) and (2) above by sending repeated
increasingly specific requests for information which seem
designed to create an impression of non-compliance even
though Musk admits TWTR produced information in
response to many of his requests which he was unable to
use to prove his contention that the bot % is materially
higher than 5%; Musk’s claim amounts to saying TWTR
breached its information production obligation because
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Musk was unable to prove his contention that there are
materially more than 5% bots;
§ TWTR produced information in good faith which likely
exceeded its obligations under section 6.4 of the
merger agreement which states in relevant part that
TWTR “shall (and shall cause each of its Subsidiaries
to) furnish promptly to such Representatives [Musk]
all information concerning the business, properties
and personnel of the Company and its Subsidiaries
as may reasonably be requested in writing, in each
case, for any reasonable business purpose related to
the consummation of the transactions contemplated
by this Agreement; provided, however, that nothing
herein shall require the Company or any of its
Subsidiaries to disclose any information to Parent or
Acquisition Sub if such disclosure would, in the
reasonable judgment of the Company, (i) cause
significant competitive harm to the Company or its
Subsidiaries if the transactions contemplated by this
Agreement are not consummated, …’);
§ Sect. 6.11 contains language which makes Musk’s
arguments regarding failure to provide information
regarding financing extraordinarily hard to win; in
this regard Sect. 6.11 provides in relevant part that:
“The parties hereto agree that any information with
respect to the prospects, projections and plans for
the business and operations of the Company and its
Subsidiaries in connection with the Financing will be
the sole responsibility of Parent, and none of the
Company, any of its Subsidiaries or any of their
respective Representatives shall be required to
provide any information or make any presentations
with respect to capital structure, the incurrence of
the Financing, other pro forma information relating
thereto or the manner in which Parent intends to
operate, or cause to be operated, the business of the
Company or its Subsidiaries after the Closing….
Notwithstanding anything to the contrary contained
in this Agreement, the Company will be deemed to
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be in compliance with this Section 6.11(a), and
neither Parent nor any of its Affiliates shall allege
that the Company is or has not been in compliance
with this Section 6.11(a), unless Parent’s failure to
obtain the Bank Debt Financing was due solely to a
deliberate action or omission taken or omitted to be
taken by the Company in material breach of its
obligations under this Section 6.11(a).”;
§ in light of the contract language above, we find it
hard to believe a Delaware Court will find this basis
for termination to be persuasive as it essentially
would create a universal out for merger contracts by
allowing buyers with buyer’s remorse to serve
numerous increasingly specific information requests
and then if unsatisfied with the responses assert a
right to termination;
§ we also note that given TWTR’s production of
information it seems premature to declare the 30
day cure period has run out as essentially all of the
information requests are related so TWTR has been
complying with many of the requests so it is not
clear the cure period has passed;
§ finally, we note that Musk waived his due diligence in
the deal; his attempt to argue that section 6.4 and
6.11 essentially gives him the right to do due
diligence after the deal is announced is contrary to
the intent of these provisions which are meant to
supplement not replace pre-deal due diligence;
o Musk’s MAC arguments (grounds 3 and 4 above) lack
factual foundation and are premature -- Musk’s MAC
argument based on the 5% bot SEC representation is weak
because Musk admits that he does not have enough
information to prove TWTR’s 5% calculation is incorrect or
misleading; lack of information is not a valid basis for
asserting a MAC; absent a contrary bot %
calculation/methodology presented by Musk or proof that
TWTR intentionally decided not to use a more accurate
method to calculate bot percentages, this argument is not
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really an independent grounds to get out of the merger
contract;
§ Musk’s MAC argument based on a generic allegation
of fundamental deterioration does not appear to be
based on any event or specific facts and seems
designed to allow for a fishing expedition where
Musk looks for a basis for a MAC argument after
asserting a MAC argument; Delaware requires an
event to be predicate for a MAC not generic
allegations of deteriorating performance;
o Musk’s ordinary course argument based on not
seeking consent to fire certain employees is not
supported by the language of Section 6.1; firing
employees is not an enumerated restricted behavior under
subsections (a) through (q) of section 6.1; there is no
credible argument that the general lead in ordinary course
language in section 6.1 implies TWTR need seek Musk’s
consent to firing employees; as Musk does not allege a
non-public disclosure schedule prohibits the firing of
certain employees, this portion of Sect. 6.1 language
applies: “x) the Company shall use its commercially
reasonable efforts to conduct the business of the Company
and its Subsidiaries in the ordinary course of business
(except with respect to actions or omissions that
constitute COVID-19 Measures), and to the extent
consistent therewith, the Company shall use its
commercially reasonable efforts to preserve substantially
intact the material components of its current business
organization, and to preserve in all material respects its
present relationships with key customers, suppliers and
other Persons with which it has material business
relations; provided that no action by the Company or its
Subsidiaries with respect to the matters specifically
addressed by any provision of this Section 6.1 shall be
deemed a breach of this sentence, unless such action
would constitute a breach of such relevant provision”;
nothing in this language requires TWTR to seek consent
from Musk to fire executives or suggests that such activity
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in inconsistent with TWTR’s ordinary course obligations
under the merger agreement; and
• Musk’s decision to terminate now shows he knows he has
a weak position which he knows is unlikely to get
stronger -- this premature termination implies that Musk is
only seeking a small price cut before the shareholder vote; even
though we think TWTR’s position is very strong in court we think
it would be in TWTR’s interest to agree to a small price cut (sub
10%) in exchange for Musk waiving all his arguments; we
acknowledge that with Musk you cannot rule out that he might
refuse to close again even after agreeing to a price cut but since
we believe he actually wants to buy TWTR we think that is very
unlikely.
If you would like to discuss any of this in any more detail, please do not
hesitate to call me at 914-441-1629.
Eric K. Laumann
Head of North American Risk Arbitrage Research
Oscar Gruss & Son Incorporated
401 North Michigan Avenue, Suite 1200
Chicago, IL 60611
Ph: 212-419-4018
Cell: 914-441-1629
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