Twitter Sues The Law Firm That Made Elon Live Up To The Contract He Signed To Buy Twitter
Elon Musk's Twitter is apparently really hard up for cash. In addition to not paying rent or other important bills, it is now trying to claw back bills that were paid just prior to Elon getting the keys to Twitter. As you may have heard, last week, Twitter sued Wachtell, Lipton, Rosen & Katz, well known powerhouse law firm for dealing with mergers and acquisitions, which very successfully represented Twitter in court to force Elon to actually complete the deal he had signed, which he then tried to get out of.
The full complaint is massive (though the actual complaint is just 32 pages, and then there are over 100 pages of exhibits) but can be summarized as Elon claiming that right before he completed the purchase, Twitter's top execs signed off on sending tens of millions of dollars to Wachtell for... successfully getting Elon to buy the company. Twitter is now basically claiming that the company overpaid the lawyers (who are famously expensive) in breach of fiduciary duty.
In the days and hours leading up to the closing of the sale of Twitter on October 27, 2022, Wachtell and its litigation department led by Bill Savitt were at the center of a spending spree by Twitter's departing executives who ran up the tab at Twitter by, among other things, facilitating the improper payment of substantial gifts to preferred law firms like Wachtell on top of the firms full hourly billings by designating tens of millions of dollars in hand outs to the firms as success or project fees. Despite having previously agreed to work on an hourly fee basis and subsequently charging millions in hourly fees under that arrangement, Wachtell disregarded both California law and its ethical and fiduciary duties in the final days of its four-month Twitter engagement to improperly solicit an unspecified clearly gargantuan success fee, as part of a $90 million total fee that also purported to satisfy Wachtell's earlier invoices that totaled $ 17,943,567.49. The $90 million fee collected from Twitter for a few months of work on a single matter represented nearly 10% of Wachtell's gross revenue in 2022, and over $1 million per Wachtell partner.
Mere hours before the October 27 closing, Twitter's Chief Legal Officer Vijaya Gadde signed anew letter agreement that Wachtell had drafted (the Closing Day Letter Agreement), which purported to award Wachtell the success fee and required payment of the balance of the $90 million total fee on incredibly accelerated terms prior to closing. Fully aware that nobody with an economic interest in Twitter's financial well-being was minding the store, Wachtell arranged to effectively line its pockets with funds from the company cash register while the keys were being handed over to the Musk Parties. By this action, Twitter's successor-in-interest, X Corp., seeks to void the unconscionable Closing Day Letter Agreement and disgorge the excess fees paid to Wachtell under the unenforceable contract and in violation of Wachtell's, and Twitter's then- leadership's, fiduciary duties and California law.
No doubt, there are some bits here that seem fishy. A massive payout right before ownership changes hands is certainly going to raise some eyebrows. However, there is at least some evidence that this is just how Wachtell works. For much of the last decade, there was a lawsuit between Carl Icahn and Wachtell regarding the firm's fees in trying to help CVR resist a takeover from Icahn. And, as securities and corporate law expert Ann Lipton pointed out on social media, this lawsuit resulted in the revelation of a Wachtell engagement letter, in which the company makes clear that if it succeeds, it expects a negotiated success fee upon reaching achievement of major milestones."
As that notes:
Our expectation is that upon conclusion of the matter or from time to time upon achievement of major milestones, our final compensation will be agreed with you, mutually and reasonably, and will reflect the fair value of what we have accomplished for the company.
That said, the complaint here suggests that this kind of arrangement was not in place with Twitter, and that it was basically a last minute raiding of the bank account. The complaint notes that while there was some discussion of a potential success fee, the eventual engagement letter was just for hourly fees, and does not mention a success fee.
That said, there are other things in the complaint where I'd argue that Twitter's claims are just laughably false, so I'm not sure how much to trust the rest of it. For example:
Beginning in early May 2022, the Musk Parties sought information from Twitter concerning the prevalence of spam bot or fake accounts on the platform, information the Musk Parties noted they were entitled to under the Merger Agreement. Twitter resisted providing the information the Musk Parties requested. The dispute played out publicly with each round of letters filed as part of regulatory disclosures. On June 6, 2022, counsel for the Musk Parties sent a letter to Gadde and Twitter reiterating the information request and indicating that Twitter's efforts to thwart the Musk Parties information rights was a clear material breach of Twitter's obligations under the merger agreement and Mr. Musk reserves all rights resulting therefrom, including his right not to consummate the transaction and his right to terminate the merger agreement.
I mean, sure that's what Musk claimed, but, as (1) was obvious at the time and (2) came out much more clearly during the lawsuit, this was all bullshit. It was a pretextual excuse for Musk to pretend he could get out of the deal when the terms of the deal did not allow that. Indeed, as became clear, Twitter had, in fact, handed over the necessary information to Musk, which only covered information necessary to close the deal (and even there, the company went above and beyond, providing him more information regarding spam, which Musk continued to misrepresent publicly).
So, forgive me for not necessarily believing the version of events described here.
There are some other eyebrow raising claims in the complaint, including the lack of details in the hourly timesheets that Wachtell submitted, but it feels kinda like this is Wachtell's standard practices, when it is billing hourly. There is also a claim that Wachtell billed Twitter for work on other matters, unrelated to the Twitter case for other clients. That seems... not great?
But the rest of the discussion does look like Wachtell negotiating a success fee from the existing Twitter executives and board. And, for all the talk of fiduciary duties, their fiduciary duty was to get Musk to pay the ridiculous sum he agreed to pay in the first place, and Wachtell certainly played a role in making that happen. Therefore, the success fee doesn't seem that crazy. Basically, Wachtell just helped Twitter's shareholders (for whom Twitter execs were working for at the time) get $44 billion. As such, a $90 million fee doesn't seem so crazy.
Now, in general, I would say it is... kinda weird... to see a law firm not detail out all of the fees, and then negotiate a multi-million dollar fee in what seems like a somewhat informal manner. But, as a counterpoint:
It seems that, sometimes, the ultra wealthy make informal agreements for staggering amounts of money.