Axios Pro Rata

A green watering can with a dollar sign painted on it.

August 27, 2022

Welcome to another regular edition of our weekend newsletter!

  • With all the action in the Twitter-Elon Musk case this week, we're taking a look at where things stand.
  • 👋 Reminder: Feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar.
  • Today’s Smart Brevity™ count is 1,106 words, a 4-minute read.

1 big thing: The road to the Twitter-Elon Musk trial

Photo illustration of Elon Musk and the Twitter logo on square abstract blocks.

Photo illustration: Aïda Amer/Axios. Photo: Jonathan Newton/The Washington Post via Getty Images

With the trial less than two months away, Twitter’s and Elon Musk’s legal teams continue to spar in court over discovery and other procedural elements of the eventual main event.

Why it matters: So far, things have mostly gone in Twitter’s favor.

Catch up quick: On Thursday, Chancellor Kathaleen McCormick ruled in favor of the social media company on three requests, with small concessions to Musk. Twitter was ordered to provide data from 9,000 accounts sampled in a fourth-quarter audit to estimate the number of spam bots on its platform.

  • McCormick said, however, that many of Musk’s data demands were "absurdly broad," amounting to trillions of data points.
  • Meanwhile, Musk now has to provide Twitter with the data analysis that his own analysts performed, which led him to question the company’s bot claims.

The big picture: Despite the dispute’s colorful and dramatic history (and its participants), it’s a pretty standard case of one party to a merger agreement trying to get out of the deal.

  • In the spring, Musk decided he wanted to acquire Twitter. He made an offer to the company’s board of directors, which determined it would be in the best interest of shareholders to accept.
  • Yet just weeks later, Musk began complaining that the company hadn’t been truthful about the number of bots on its network, insisting the problem was much larger than he initially believed.

State of play: To win — and thus, get out of the deal and minimize penalties — Musk will have to prove either that Twitter breached the terms of the contract or that it defrauded him.

Breach of contract: Musk would have to show that Twitter hadn’t lived up to something in the contract — namely, that it promised it wasn’t hiding any significant information, explains Ann Lipton, Tulane University professor of law.

  • The billionaire also has accused the company of not handing over information it was obligated to.

Fraud: Alternatively, Musk could try to prove that Twitter had outright lied about its business.

  • While Musk's due diligence ahead of the deal appears to have been limited, he could try to show that Twitter had been making false public statements (like documents filed with regulators), which he relied on.

Between the lines: So far, the facts appear to favor Twitter and paint Musk as a buyer with remorse, says Lipton.

  • Where there’s much less consensus is what the remedy should be: "specific performance" or damages, which in the contract are capped at $1 billion.
  • If the court finds that specific performance is the appropriate solution, it would order Musk to acquire Twitter, as there’s no real substitute for it.
  • Alternatively, McCormick could require Musk to just pay Twitter for all the trouble.

Yes, but: The two sides could still settle the case before it goes to trial, though it’s unclear how willing they are at this point.

2. Meet the players

Illustration of a stack of paper and money.

Illustration: Aïda Amer/Axios

Both Twitter and Elon Musk have stacked their legal teams with top litigation firms.

Twitter is represented by Wachtell, Lipton, Rosen & Katz.

  • In 202o the firm brought on Leo Strine, a former chancellor of the Delaware Court of Chancery.
  • Twitter also hired Potter Anderson & Corroon, and Wilson Sonsini Goodrich & Rosati, along with other firms to round out the army of lawyers working to get Musk to keep his word.

On the other side, Elon Musk is represented by Skadden, Arps, Slate, Meagher & Flom, and Quinn Emanuel Urquhart & Sullivan.

  • Notably, Quinn Emanuel's Alex Spiro once won a jury verdict in Musk's favor: That involved the infamous cave expert's defamation lawsuit against him.
  • Colleague Andrew Rossman is an expert in complex litigation.

The referee is Chancellor Kathaleen McCormick.

  • McCormick joined Delaware's Chancery Court in 2018, then as a vice chancellor, before taking over the chancellor (chief judge) post in May 2021. She's the first woman to hold the job.
  • She is also overseeing a separate Elon Musk case in the court, this one challenging Musk's $56 billion Tesla pay package. It's set for trial in October as well.
  • McCormick got her undergraduate degree from Harvard and her law degree from Notre Dame. She is a Delaware native.

3. The wild card

Illustrated collage of a whistle over square abstract blocks.

Illustration: Aïda Amer/Axios

This week, Twitter's former head of security — famed hacker Peiter "Mudge" Zatko — disclosed that he had filed a whistleblower complaint with several federal agencies over the company's handling of cybersecurity concerns.

Why it matters: The news initially made headlines as an explosive turn of events that might help Elon Musk prevail in the merger dispute. Still, it's not clear if it will affect the case at all.

The claims: Zatko's complaints are mainly focused on Twitter's public statements about user and spam bot metrics, and its broader security deficiencies. He argues it likely amounts to a breach of its 2011 settlement with the Federal Trade Commission.

Between the lines: Zatko's claims about Twitter's "monetizable daily active users" (mDAU) metrics actually support the company's own statements.

  • "Executives are incentivized to avoid counting spam bots as mDAU... and advertisers use it to calculate the effectiveness of ads," writes Zatko.
  • "However there are many millions of active accounts that are not considered 'mDAU,' either because they are spam bots or because Twitter does not believe it can monetize them," he adds.

Twitter's own statements in its SEC filings have been about how much spam gets through the cracks and makes it into its mDAU count — not the rest of the service. That's what it has to try its best to be accurate about, though it still admits the calculations are subjective estimates.

Yes, but: That leaves Zatko's claims that Twitter's security is shoddy, and in violation of its agreement with the FTC.

Twitter has pushed back against Zatko's claims, calling them "foundationally, technically and historically inaccurate."

📚 Due Diligence

  • Twitter Whistleblowing Report Actually Seems To Confirm Twitter's Legal Argument, While Pretending To Support Musk's (TechDirt)
  • The merger term that could decide Twitter vs. Musk (Axios)
  • Nightmare scenarios from whistleblower's Twitter complaint (Axios)

🧩 Trivia

Wachtell, Lipton, Rosen & Katz indirectly played another role in this saga before representing Twitter in its lawsuit.

  • Question: Which founding partner invented the legal tool Twitter initially used to prevent Musk from increasing his stake in the company? (Answer at the bottom.)

🧮 Final Numbers

Data: Ycharts; Chart: Erin Davis/Axios Visuals

🙏 Thanks for reading! See you on Monday for Pro Rata's weekday programming, and please ask your friends, colleagues and M&A lawyers to sign up.

Trivia answer: Founding partner Martin Lipton is credited with creating the "poison pill takeover defense," or shareholder rights plan.