Twitter v. Elon Musk
Few merger cases have captivated the nation like the acquisition-litigation battle royal that is Elon Musk’s takeover of the social media company Twitter. Musk, the world’s richest man, has taken highly unusual steps in his pursuit of and then in his attempt to pull out of the Twitter deal. M&A scholar, Prof. Eric Talley uses this fascinating and famous example to teach both how mergers are locked into place as well as the levers of power that are built into purchase agreements that can give buyers the power to walk away from even a signed deal. Prof Talley goes on to explain what is truly unique from a legal perspective about the Twitter-Musk deal.
Eric Talley is a professor at Columbia Law School and a national expert on corporate and M&A law.
Select Cases Discussed
Selectica, Inc. v. Versata Enterprises, Inc., et al. – Delaware Court of Chancery (2010)
Snow Phipps Group, LLC v. KCAKE Acquisition, Inc, et al. – Delaware Court of Chancery (2021)
Select M&A Terms Discussed
- Standstill Agreement. A standstill agreement may be used as a form of defense to a takeover disfavored by the board when a target company acquires a promise from a bidder to limit the amount of stock that the bidder buys or holds in the target company in exchange for certain rights or benefits to the shareholder.
- Tender Offer. A tender offer is a public bid for stockholders to sell their stock. Typically, a tender offer is commenced when the company making the offer – the bidder – places a summary advertisement, or “tombstone,” in a major national newspaper and the offer to purchase is printed and mailed to the target company’s stockholders. A tender offer must comply with the rules and regulations of the SEC, which include certain disclosure requirements, minimum offering periods, withdrawal rights, manner of publication, and other requirements.
- Poison Pill. A poison pill is a tool used by corporate boards to make an acquisition intolerably expensive. The way that a poison pill works is by setting a trigger or threshold in the terms of stock ownership which, if reached or surpassed by a particular shareholder, will result in the dilution of that shareholder's interest in the company. For example if a company could set its poison pill trigger at 15% of the company’s stock. If a shareholder then purchases for example 17% position in the company, the company may then make significant quantities of stock available for purchase to all other shareholders at a reduced price or even at no cost at all. This can both make the potential acquisition more expensive and at the same time significantly dilute the potential acquirer's share and devalue their investment.
- Reverse Triangular Merger. A reverse triangular merger is a type of merger where the buyer forms a subsidiary which it then uses to merge with the target company (“the target”). The target then absorbs the buyer subsidiary which no longer exists as a separate legal entity. The target services as the buyers subsidiary.
- Material Adverse Effect. In acquisition agreements, Material Adverse Effect (“MAE”) provisions can allow a party to walk away from a signed deal if certain types of material changes have occurred at the company. These provisions typically come with a list of exceptions such as recessions, wars, earthquakes, and now pandemics, and are narrowly interpreted by courts.
- Bring-Down. A bring-down condition is a closing condition reaffirming the accuracy of the representations and warranties from an agreement at the time of the closing. Reps and warranties can in some cases be signed months in advance of closing.
- Big Boy Clause or Big Boy Letter. A “big boy” letter or clause is a pre-sale agreement in connection with a sale not to sue over non-disclosure of material inside information that is not disclosed, entered into between two sophisticated parties. Big boy provisions may also be contained within securities purchase agreements, rather than being the subject of a separate letter agreement.
- CFIUS. The Committee on Foreign Investment in the United States (CFIUS) assesses the potential national security risks of investments in the U.S. and operates in a classified environment.