Lessons from the Twitter v. Musk Litigation

Due Diligence Period? Material Adverse Effect? Misrepresentation? What these things mean for the rest of us doing deals…

Many of us have either negotiated or been a party to a written contract for the sale or purchase of land, assets or real estate. When I am retained to document a potential transaction for a client, generally we begin with a term sheet or a letter of intent. Those preliminary documents are almost never intended to be comprehensive, nor binding upon the parties. That is what the “Definitive Agreements¹” are for: to spell out all of the intricacies of the deal in detail, and bind the parties to their obligations to complete the transaction.

Here is an example of a introductory paragraph from a Letter of Intent:

This letter of intent sets forth some general terms and conditions of a possible agreement pursuant to which _______________________. and/or its affiliated assigns (“Buyer”) would acquire the above-referenced real estate (the “Property”) from the record owners (“Seller”) of the Property.  The following constitute several of the terms of the transaction which Buyer proposes to Seller (the “Transaction”).  Upon acceptance of these terms, Buyer will request its counsel to prepare a draft of a formal Purchase and Sale Agreement (the “Definitive Agreement”).

Thus, the Definitive Agreement is everything - it is the beginning and the end of the deal, and one should be diligent about making sure the terms of the Definitive Agreement are correct and accurate. There is much in common between the proposed Musk/Twitter merger and your typical middle market commercial transaction.

In the Twitter v. Musk litigation, the proposed Merger Agreement is the controlling document. The Merger Agreement itself has not been disclosed, but it has been described in various SEC Filings by Twitter. Consider this passage from Twitter’s SEC Form 8-K filed on April 25, 2022:

Upon termination of the Merger Agreement under specified limited circumstances, Twitter will be required to pay Parent a termination fee of $1.0 billion. Specifically, this termination fee is payable by Twitter to Parent because (1) Twitter terminates the Merger Agreement to allow Twitter to enter into a definitive agreement for a competing acquisition proposal that constitutes a Superior Proposal; or (2) Parent terminates the Merger Agreement because the Board recommends that Twitter’s stockholders vote against the adoption of the Merger Agreement or in favor of any competing acquisition proposal. This termination fee will also be payable by Twitter to Parent in the event that, generally, (1) a competing acquisition proposal for 50% or more of the stock or consolidated assets of Twitter has been publicly announced and not withdrawn, (2) the Merger Agreement is terminated because Twitter’s stockholders fail to adopt the Merger Agreement or because Twitter materially breaches the Merger Agreement, and (3) within twelve months of such termination of the Merger Agreement, Twitter enters into a definitive agreement providing for a competing acquisition proposal for 50% or more of the stock or consolidated assets of Twitter and such acquisition is subsequently consummated.

(Emphasis added by author).

Allow me to cut through all that verbiage: If Twitter materially breaches the Merger Agreement, then Twitter will owe Musk’s acquisition entity a termination fee of $1 Billion. With the way Congress has been printing money willy-nilly since the pandemic, people have become desensitized to how much a billion or a trillion dollars really is.