Elon Musk’s attempt to beat his way out of paying $44 billion for Twitter has reached its latest phase, after months of Musk field-testing his legal argument in public. Musk has filed with the Securities and Exchange Commission to terminate his agreement to buy the social network for $54.20 per share, and Twitter’s board has said it will take him to court—in Delaware!—to force him to close the deal on the agreed terms.
Wall Street has long believed that Musk will succeed, whether that means backing out altogether or paying a lower price for Twitter. Academics and financial journalists, on the other hand, have mostly thrown their hands up in baffled bemusement and uncertainty about what will win out: Musk’s brute force, or the seemingly ironclad contract he signed with Twitter. (That contract calls for a $1 billion fee if Musk nukes the deal, but it also gives Twitter a mechanism, which it is using, to try to force him to close anyway.)
I talked this week with one of those experts: David F. Larcker, a professor emeritus of accounting and corporate governance at the Stanford Graduate School of Business. Larcker, as he took pains to mention a few times in our conversation, has a business-governance background and is not a lawyer. On some level, he is as befuddled about what comes next as you or me. On another, I asked him to walk me through the mechanics of the likely court fight between Musk and Twitter, all of the ways this saga could yet conclude, and why the “Delaware Court of Chancery” is having a moment in the sun. Our conversation is lightly edited for clarity.
Alex Kirshner: From your perspective, let’s just start here: How many possible ways do you see that this could still go—If there’s an option A, option B, option C, option D?
David Larcker: What I want to say is an infinite number of ways, but I won’t say that. So this is going to end up in court, and the court’s going to decide. This is not one of these matters of public opinion or something like that. The court could decide based on the documents that were signed in the merger. In these agreements, there’ll be covenants and things in there that will basically say, “I can walk away from this thing if you lie to me, you don’t give me the information that I request,” stuff like that. It’s going to be very technical contract law. He’s trying to step away saying, “Maybe I’ll have to pay the billion-dollar breakup fee, but that’s a lot less than I would have to pay if I bought Twitter for $44 billion.” Or potentially the loss between what Twitter’s selling for today versus $54.20, which is around, I don’t know, $15 to 20 billion. [Note: At the stock’s price on Tuesday afternoon, it was about an $18 billion difference.]
This is going to come to a head in the Delaware Court of Chancery. Twitter’s board chair was specific in mentioning that court when he said Twitter would pursue a legal remedy. It might be useful for people to understand: Why Delaware? Given that we are talking about a Bay Area tech company and a South African billionaire, what is it about the Delaware Court of Chancery that made it the court of jurisdiction for this contract dispute?
So, about 60 to 70 percent of U.S. corporations are incorporated in Delaware, but their headquarters could be anywhere. The reason that has happened is that these are state law issues. I’m sure there are federal claims here too, but these governance issues like this are typically decided in state court. So rather than having 50 state courts each do their own thing, over time—over hundreds of years—it just happened that Delaware was friendly to this and opened up their courts and said, “Yeah, let’s get a consistent body of corporate law and we’ll take this seriously in Delaware,” and it’s just expediency and efficiency. However Delaware law decides, many other states will follow. So there’s corporations incorporated in every state. It’s just the mass of them and the really big ones tend to be incorporated in Delaware. They can take advantage of known rules of common law and stuff like that.
And Delaware gets filing fees and gets to build a sort of cottage industry.
Yeah. That’s one of the reasons they don’t have a state tax, and that kind of thing. It’s a little bit tit-for-tat.
Twitter’s going to say, “You owe us 44 billion dollars. We did everything appropriately.” Musk is going to say, “No you didn’t, and you violated all these things, and I can walk away from this.” Then it’s dumped on the court, which doesn’t go on forever. Delaware works in a speedy manner. They make these decisions, so they have the skills and setup to do that kind of stuff.
So this can unfold over a couple of months, rather than a couple of years.
I think that’s right, yeah. There’ll be enormous law firms and expert people weighing in on one side or the other. The things that could happen are: The court could say, “OK, you can walk away for a billion dollars.” It could be, “I’m going to force you to buy this company as you signed the contract.” There could be some middle ground. Maybe they say, “Well I’m not going to force you to buy the company, but you’ve got to pay a $10 billion dollar breakup fee,” or something like that.
So the judge could freelance and say, “Hey, this is what I think is fair,” even though the contract doesn’t say anything about a middle ground. There is some disagreement about this.
I think that’s right, although I’m not a lawyer. The other thing that could happen is there could be some side stuff going on, and the Twitter board might say that they thought $54.20 was a good deal. Who knows what their internal evaluations were that Goldman Sachs pulled together? They may renegotiate the deal. And so it may be less than $54.20 [for Musk to buy the company], or something like that. When I say almost anything can happen, I think that’s kind of literally true.
The other thing to remember: It puts the chancery court in a pretty tough position. I don’t believe there’s been a deal like this ever. I mean, there have been cases where they said you could walk away or, “Hey, you have to buy this company at the agreed-upon deal.” But not of this size, and not of these types of players, I think. There’s going to be a precedent set. So for the chancery, it’s a big deal for them. There will be some people on one side saying, “Yeah, you signed a contract, you’re just trying to weasel out of this thing.” If the court lets them, then it’s like, “OK, where’s the line?”
So, from a corporate governance, corporate law standpoint, it’s a big deal. It’s going to be highly watched. It’s going to be something that I don’t think we’ve ever dealt with before. I’ve said to some people, “Stay tuned. Who knows what’s going to happen here?”
I assume that if I’m someone who cares about Delaware’s reputation as a staid and respectable place for corporate law—say if I’m the Delaware secretary of state—I’m probably pretty nervous about what would happen if the court ordered Elon Musk to pay and he just said, “No I’m not doing that,” given how he feels about authority. Is that a fair read on how Delaware might feel about this?
Yeah, that’s a wild card. This is one of these things academics wonder about over lunch. Let’s say that they say, “You got to cough up $44 billion,” and Musk says, ”I’m not doing it.” What do you do? I mean—
Is there Delaware chancery jail?
I don’t think there is. [Note: It seems like there is pretty much not. Pretty much.]
But I don’t know. I mean, it must be the case that they could put a lien on all of this Tesla stock or stuff like that. But again, I don’t think it’s ever happened, you know? I mean, Musk is an incredibly creative and smart guy, but he’s had a history of, let’s say, running around the edges of corporate governance with the SEC and everything. So you get that in the mix as well, and that’s not legal.
It’s sort of like: Do you want the court to look as if it was bullied by somebody like this? You’d say that’s probably a bad thing. It has soap opera aspects where, again I don’t think there’s much [precedent] to look at. There’s a lot of little ones—not little from our perspective, but this is a huge deal. Highly watched. It’s going to be very interesting.
Musk’s lawyers and Twitter’s lawyers are going to argue about “specific performance” and about what happens if Musk’s financing to buy Twitter were to magically become unavailable to him. I’m wondering about it from the perspective of Musk’s bankers, who agreed to lend him billions of dollars to make this deal happen. The banks would seem like a bit of a wild card here too then, right? They would like to keep him as a client and keep him happy. They seem poised to lose money if the deal goes through and save money if it does not. Could they just yank the money and give Elon a way out?
He has arranged the financials. Now, then the issue for the lawyers is: Can the banks step away from this agreement now or not? I don’t know. But yeah, the bankers, they got a big origination fee. I’m sure they got a serious interest rate, risk-adjusted and all that. What is their fiduciary role in this and can they step away, and could that cause the deal to crater under the terms of the contract? I don’t know, but that’s a good question to ask a corporate lawyer.
The incentives game is interesting, though, between Musk’s personal risk and Twitter’s risk. Who do you think should be more scared: the richest person in the world getting stuck with a $44 billion anchor that he doesn’t want, or the board, which has an agreement for a way higher price than the stock would actually be worth if Twitter continued to trade on public markets after Musk successfully walked?
To my eye, the Twitter board did exactly what it was supposed to do. They got this unsolicited deal. They formed a special committee of independent directors, got outside legal and financing help to evaluate the thing, and discussed it internally. And they came to an agreement saying, “Based on what we know about the company or future plans or whatever, $54.20 seems good to me, we’ll set this.”
I think the board would get back together and say, “Do we want the billion dollars? And of course they incurred all kinds of legal costs and finance expertise costs and all that. “Or do we think the deal is such that given the probability of us winning the case and forcing the $44 billion deal to go through, net net, what are we willing to do?” I think they did the right thing, which is to decide, “We think we have a pretty strong case. $44 billion is real money for our shareholders. We have a fiduciary duty there, so we’re taking it into Delaware court.” They’re going to be sued for sure. I mean, this is America, where the joke is anybody can sue anybody for anything, any time.
On the Musk side, this is a deal that he’s doing personally. I don’t know if this has been instrumental in Tesla’s stock price dropping pretty seriously in the last three, four months. I’m sure there’s some correlation in some form. They’re not independent things. He’s got a duty to all these shareholders and all this kind of stuff. I think what he’s doing is just something he thinks is something he wants to do. He is still running Tesla. He’s still running all these other things. It’s just that he’s got himself stuck here a little bit, apparently. My guess is there’s reasonable claims on both sides, but it’s going to turn on how the contracts are interpreted, who’s satisfied, and all that kind of stuff. Then there will be many experts, lawyers. It’s going to be sort of a show, and the judge will make a decision.
My instinct is a bit of an uphill story for Musk, unless there’s a smoking gun of some form in what Twitter did or provided or whatever. Then they’ll bring in experts. How many bots were there, and how big a deal is this for revenue generation? There will be experts on both sides debating this.
I’m sure that you’ve in your career looked at a lot of different mergers and acquisitions. Which outcome seems harder to comprehend to you? Is it Delaware’s court buying this seemingly ridiculous argument that fake accounts mean he should get out of this document that he signed and make the contract worthless? Or is it someone getting stuck with a $44 billion thing that he clearly doesn’t want, which also has a lot of cultural and political relevance?
If someone’s reckless and has every opportunity to do all the due diligence and ignores it, or just is sort of playing, I think that’s really bad for the economy and bad for business. I think Delaware would take a very, very dim view of this. You can’t have that in well-functioning markets. It’s a big social issue here.
I think some of the actions are things that you don’t want to have happen in a well-functioning system—which I think we do have here, but then there could be this thing. Honestly, I think anything can happen. I think however it’s decided, it’s going to have consequences going forward in the market for corporate control. So I think it’s a big one.