Twitter Shareholders Approve Sale Of The Company To Some Dude Who Still Doesn’t Understand He Signed A Binding Contract To Buy It

Matt Levine, over at Bloomberg, whose coverage of the Elon Musk/Twitter saga has been excellent (his coverage of most things has been excellent, but especially the Musk/Twitter stuff), recently wrote that he was coming to the conclusion that Elon Musk simply does not know what a merger agreement means.

As he explains, if you want to buy a company, but still want to do due diligence, you can first do a memorandum of understanding that more or less says you're going to buy it, but which leaves an out if your due diligence turns up some bad stuff. But what you shouldn't do is sign a binding merger agreement that explicitly waives due diligence, and then try to demand due diligence and claim you can still get out of the deal.

I think that the simplest explanation might be that Elon Musk does not know what a merger agreement is. It is not uncommon, in the world, for two companies to get together and discuss one buying the other. And sometimes these talks will go well and they will get together and sign some sort of document - a memorandum of understanding," perhaps - that says, basically, now we are going to talk really seriously about me buying you." Sometimes they will have a price lined up when they sign this document, say $54.20, and that price will be written into the document, and the expectation will be that eventually the buyer will pay $54.20 to buy the seller. But things can go wrong. There will be continuing due diligence, where the buyer examines the seller's business, and the buyer might change its mind. Facts might come to light in due diligence that could make the buyer walk away or want to revise the price downward. The market might crash, making the seller less valuable or making it harder for the buyer to get financing. The MOU is an agreement to talk more seriously; it reflects a general mutual desire to come to a deal at $54.20, but it is not binding. Nobody is committed to a deal at $54.20. Nothing is certain until the final deal is signed.

That, again, is a description of a thing that can happen in the world; some business acquisitions do go through a process like that. But it is not a description of US public-company merger agreements. In normal US public-company mergers, you don't sign a memorandum saying we're going to negotiate seriously about buying you." You negotiate seriously, and then you sign a merger agreement saying we agree to buy you for $54.20." And then if the buyer changes its mind, it still has to pay $54.20. And if the market crashes, the buyer still has to pay $54.20. The deal is the deal; once it is signed, the merger agreement is binding and definitive.

Read the whole thing for some more insights.

Anyway, the Musk/Twitter fight is continuing, and Twitter's letter to the judge asking for sanctions against Musk, which revealed some text messages that were showed to Twitter by Musk's financial advisors (but not by Musk himself), was finally unsealed (first noted by the excellent Chancery Daily). And some of the details suggest that Levine is 100% correct and that Musk has no clue what a merger agreement is, as he was telling his advisors at Morgan Stanley that he wanted to do more due diligence after he'd signed the deal in which he explicitly waived due diligence (first highlighted by Kostya Medvedovsky on Twitter).

In those text messages to Morgan Stanley's Michael Grimes (and not, as some people have falsely assumed, Musk's ex, the singer Grimes), Musk repeatedly talks about the need to do due diligence after the deal was signed, and how he wanted out of the deal if the due diligence turned up stuff he didn't like. This is on May 8th, or two weeks after he signed the merger agreement in which he waived due diligence.

If you can't see the above image, the texts state:

An extremely fundamental due diligence item is understanding exactly how Twitter confirms that 95% of their daily active users are both real people and not double-counted.

If that number is more like 50% or lower, which is what I would guess based on my feed, then they have been fundamentally misrepresenting the value of Twitter to advertisers and investors.

To be super clear, this deal moves forward if it passes due diligence, but obviously not if there are massive gaping holes.

That's not how any of this works.

And, to be clear, Those texts came about half an hour after Musk texted the same guy to say he wanted to slow down" the deal, as he was saying it won't make sense to buy Twitter if we're heading into WW3." Of course, by that point, he'd already committed.

So, anyway, there are multiple things to note about all this.

1. His failure to turn over the texts is really bad. Not complying with discovery can come back to bite you.
2. While the slow down" texts were revealed in the hearing last week, it really confirms that Musk is trying to get out of the deal because of cold feet, and not for any of this nonsense about spam, something he came up with half an hour later as he realized he couldn't just bail because of WW3."
3. My goodness does he not understand anything. Not only does he not seem to understand that you do due diligence before you sign a merger agreement where you waive further due diligence, but he still seems to think that Twitter is claiming that 95% of their daily active users" are real people." But, as we've explained over and over again (and surely, someone has explained to Musk), Twitter has never said that 95% of its daily active users are real people. Twitter has always made clear that the number they report, mDAU, is their estimate of monetizable" daily active users, meaning that they already exclude bots/spam, etc. The 5% number is an estimate that is made after they already exclude all that other stuff, and hand-check a statistically significant sample to see if they missed some spam.
4. What kind of fool thinks that, as the world's richest man, with 100 million followers on Twitter, his own experience with his own feed is somehow representative of the service as a whole? I mean, I get that he's not an empathetic kind of person, but seriously? Can't he recognize that his personal experience is not the norm?

Honestly, this whole thing is quite incredible. Chancery Daily also notes that the formal nature and full sentences of the later texts (not to mention the 30 minute pause between the initial texts and the last one) at least would fit with a scenario in which Musk sends the uh oh, WW3, slow down!" texts, then someone calls him and is like dude, this is all discoverable in the inevitable lawsuit and you can't get out 'cause of WW3" and so then Musk gets all fancy with his due diligence" and spam" nonsense.

The document also still suggests Musk is hiding texts from discovery, including Twitter noting an exchange between Musk and a banker, Robert Steel, in which it's clear Steel is responding to texts from Musk, but those texts are not present.

You don't need to be Sherlock Holmes to notice that a text message or two from Musk appears to be missing.

Anyway... while all that was going on, the Twitter shareholder vote on whether or not to approve the deal also happened. This has been in motion for a while, and if everything had gone according to plan (ha!) then this would have basically been one of the final steps before the deal actually closed. Now it's just a thing in the background. And, yeah, the shareholders approved the deal. Because they're not foolish and they know that's the most likely way they're going to get a payday of some sort.

So, in the end, the shareholders have approved the deal to sell Twitter to a guy who still doesn't seem to understand that he signed a binding agreement to do so.