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  • Amit Sharma

Importance of Precise Contract Language

Updated: Oct 28, 2022


*Update: Now that that deal has finally been consummated, for those who were still interested, @profEricTalley has a crisp summary of takeaways here (from what was essentially a contract dispute).

(Bottomline - Delaware Chancery Court further cemented its sterling reputation for corporate law.)

*


Musk vs. Twitter is a saga that keeps on giving.


Whether you're a Tesla shareholder, a Delaware Law geek, an analyst interested in knowing the innards of Twitter's algorithm, or an M&A enthusiast tracking Big Law, or a 'Meme'er here just for fun, or just have an opinion in favor / against Musk buying Twitter - there is something for everyone here.


At ContractKen, however, we're (mostly) interested in how the use of ambiguous language in M&A contracts and hasty due diligence (apparently 'waived off') may end up costing the richest person on the planet anywhere between $1 Bn and $44 Bn


Skimping on high quality contract review can literally cost you billions

Lets first get into the timeline:

  • ...

  • 4/5: Twitter invites Musk to join the board (as he announces that he has acquired a 9.2% stake)

  • 4/11: Musk declines the offer

  • 4/13: Musk makes a formal bid at $54.20 (a premium of 54% on $TWTR the day)

  • 4/15: Twitter adopts a ‘Poison Pill’ strategy to thwart the bid

  • 4/16: Twitter CEO tweets about context and methodology for spambot calculation on the platform. Musk responds with this, famous, emoji (this is an exhibit, btw, in ongoing litigation)

  • 4/25: Twitter exempts Musk from Poison Pill Agreement

  • 4/25: M&A agreement signed (note: Musk 'waived' due diligence to get Twitter to accept his 'best and final offer')

  • 4/28: Twitter’s 8K filing showing recast of mDAUs (monetizable Daily Active Users)

  • 5/4: Musk files 13D, while keeps tweeting about making Twitter algo open source

  • 5/5: Twitter stock starts tumbling (along with the market in general)

  • 5/13: Musk informs (via tweet) the he's putting the deal on hold suspecting a huge % of bots amongst users ($TWTR now has tumbled to $40.72)

  • 5/21: Musk tweets inviting applications to build a litigation department at Tesla

  • 6/6: Musk’s legal team sends a notice to Twitter about the bot problem

  • 6/8: Twitter shares ‘Firehose API’ data with Musk’s team

  • 7/8: Musk announces that he’s walking away from the deal

  • 7/13: Twitter files a suit in Delaware court against Musk for violating the terms of M&A agreement

  • 7/19: Twitter gets a sort of win over Musk with the trial fast-tracked to October '22

  • ...

 

Update on 7/29: a cool decision tree type of explainer on possible outcomes

(h/t https://twitter.com/ProfEricTalley):



possible outcome: twitter vs elon musk

While there are surely many twists remaining in this saga, let's unpack the impact of specific language, clauses on the potential outcome. Following are key clauses of interest (all of which were detected neatly by ContractKen’s word addin), likely to be at the core of litigation:


1. Non-disparagement (Section 6.8) – this is to prevent either party from disparaging the other. Twitter claims that Mr. Musk has breached this with his poop emoji as a response to the Twitter CEO’s thread about spam bot calculation


2. Termination for Convenience (Article VIII) – defines the rights either party have to terminate the agreement. Refers to Section 8.3 (Parent Termination Fee of $1 Bn)


3. Access to Information; Confidentiality (Section 6.4) – defines how much and for what purpose can Twitter share information. Musk’s side has claimed that Twitter’s lack of co-operating in sharing data (which is breach of a covenant of the agreement) has hindered their due diligence, and tweeted that Twitter will have to make this information public as a part of litigation.


4. Material Contracts (Section 4.16) – defines all the contracts that Twitter has and is not in breach of. Imagine the number of such contracts (across jurisdictions) that junior associates of Musk’s legal team will have to scour through during discovery (given that he waived due-diligence!). Raffi articulates this beautifully in this tweet thread.


5. Covenant to conduct ordinary business (Section 6.1) - Twitter's obligation to 'use its commercially reasonable efforts to conduct the business of the Company and its Subsidiaries in the ordinary course of business (except with respect to actions or omissions that constitute COVID-19 Measures), ...' Apparently, there is a hierarchy of standards to determine the level of effort in 'best efforts' vs 'reasonable efforts' vs 'commercially reasonable efforts'!! (phew)


The Bottom Line

Ambiguous and vague language elements, when left in contracts can cause many disputes. If you pick up any contract, you’ll see it full of terms and clauses whose interpretation two people even in the same organization would not agree upon, let alone two different parties. Luckily, most business agreements are never litigated.

But when they are, like this one, several different aspects are subject to contract law. This is why Delaware's Chancery Court has such an outsized impact on US corporate life.

So, no matter how rich you are, you would not want to leave a large fortune subject to anyone's interpretation.


Aim of contract negotiations should be to not just secure favorable or acceptable positions but also to eliminate all ambiguity and vagueness from language used in contracts

Broadly, these are the few key tenets to the argument –

  • Issue of data sharing: If the information supplied by Twitter (under a specific set of assumptions or methodology) shows that % of bots is much higher than their SEC filings, it definitely creates a material impact on the company’s business (advertisers, real engagement, etc.) and Musk is likely to use that to disparage the company or terminate the agreement (as opposed to consummate the deal – which is the intended purpose of information sharing as per the original contract language).

Twitter can hold back information if it feels that there is too much of a competitive risk of opening the books completely to someone who is intending to walk away.

The biggest mistake that Mr. Musk has done is waiving his right to due diligence (due to the absence of such a clause) prior to signing the agreement.


  • What constitutes a ‘materially adverse event’ – Musk’s claim that % of bot accounts on Twitter is the order of magnitude higher than what Twitter’s SEC filings show (i.e. 5%) is itself challenging since fixing the bot problem was one of the ideas that Musk tweeted about. What is the threshold (of bot %) at which Musk’s side can claim a materially adverse event is supposed to have triggered the termination clause?

The actual mechanics of % of bot calculation during the discovery and litigation process will be quite revealing for everyone, not just involved parties. Delaware Court is famous for taking a very conservative view of MAE and has given only one ruling involving MAE in the past. So, the odds are stacked against Mr. Musk here.

There are many other points, like what constitutes 'specific performance' or what are 'equitable remedies' that are critical to the judgment. The M&A contract has a huge amount of language left to the interpretation of the Delaware Chancery Court Judges, which we'll be surely watching carefully from October onwards. Whatever the outcome is, two key learnings for everyone:

  1. Never skimp on due diligence of material contracts

  2. Reading your legal team's emails is sometimes better than browsing Reddit or Twitter ;)

This is a saga that continues to entertain and educate. If you're interested in digging deeper, here are some reads:

 

Read further:

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