OA590: Musk Buys Twitter. The Deal Is Done. Or Is It?

Transcript

This transcript was generated automatically and may contain errors — the audio is the record.

0:01:17 Thomas: Hello and welcome to Opening Arguments. This is episode 590. I'm Thomas and holy smokes do we have so much to tell you, so much to cover. I know we always say that but this time as much or more than ever. How's it going Andrew?

0:01:30 Andrew: It is going fantastically well Thomas, how are you?

0:01:32 Thomas: Good. I just, I want to get to it. I want to let people know that we did Law'd Awful Movies on Marjorie Taylor Greene. It was delightful. Now I want to clarify, I think there are some people who, I don't know, reacted a certain way to us doing that maybe because they haven't heard the show before despite being patrons yeah Um, we're not just jumping on to like say, "Ah ha ha, this idiot." Like, it's, the legal issue is something we've covered and is interesting, and also it's a Law'd Awful Movies of, uh, how, how tough she was and how, um, much she can't remember anything, allegedly, uh, in her, testimony. It's a lot of legal stuff. So lest anyone think it's just us, like, making jokes at how dumb she is or something, it's not really much of that at all, because her, there's a lot there to cover that's substantive and a few jokes along the way, because it's Law'd Awful Movies.

0:01:49 Andrew: Oh, we lost a patron, yeah, yeah.

0:02:23 Andrew: Yeah, it's not a typical Law'd Awful Movies in that, you know, we're watching real life unfold in front of us, but I, you know, this is also not like rewarding. The criticism that I saw was, you now, we're giving her oxygen, which, you know, it's kind of silly for a patron only special, but

0:02:38 Thomas: Which is a really weird thing to say about us doing a patron show for $2 and up. Like, are we worried about those folks are going to be like, oh, hold on. Who's this Marjorie Taylor Greene? Maybe she's onto something. Is that a significant worry? It doesn't make any sense to me, but it's

0:02:49 Andrew: I don't think so. I Really think, if you like, the times that we have gone through trial testimony, depositions, that sort of thing, I really, I talk a lot about trial practice here and, you know, the kinds of follow-up questions that I would have asked, again, with the benefit of hindsight, side to right it, I think I really think you'll enjoy it.

0:03:13 Thomas: Great.

0:03:13 Andrew: If, if you have, yeah.

0:03:14 Thomas: It's one of those where we learn a lot, have a few laughs. I loved it. Okay. So that's up already, patreon.com/law. Another news.

0:03:14 Andrew: Yep. What Yep.

0:03:22 Thomas: Are speaking with Andrew Seidel next episode, which everyone I'm sure knows means that the separation of church and state is being further eroded in some horrible way, but we get to have Andrew Seidel on along the way. So it's making the the best of the situation.

0:03:36 Thomas: You know, like I feel like that's about as good as we're going to feel while the separation of church and state is crumbling. So that's a lot of fun. Look forward to that on Tuesday.

0:03:35 Andrew: I think Yeah, and I would just add, you know, we basically had two sort of major stories break this week, right? The first were the oral arguments in the Bremerton case. That's to the what you just alluded. That is the high school football coach praying at the 50-yard line. And the second, obviously, is Elon Musk buying Twitter. No chance, I mean, unless we went four hours, right, that we could cover both of those stories in today's episode. So we're going to bring in an expert in Andrew Seidel, cover to that on Tuesday. Tuesday, and, uh, today we are going to break down the Elon Musk Twitter acquisition and I am super excited about that. Yeah.

0:04:20 Thomas: Oh, can't wait. Time to talk Elon Elon Musk.

0:04:24 Clip: Down the law, down the law.

0:04:28 Thomas: Okay, so Andrew, I have a million questions about this, as I often do, and I told you. And then, you know, you went down the research rabbit hole, and now we have a fantastic deep dive planned. But I would like to know, as we've seen, it's been reported this deal is like finalized. Musk is going to own Twitter. If he doesn't already, I don't know. You're going to tell us. My first question was, how? Is this a thing that anyone can just do? Elon Musk Ask by any company, could any billionaire, if you have enough money due to how these things work, where it's like the shareholders have that responsibility to whatever, you know, the board has the responsibility, whatever weird rules, why, how can he just do this? And can he buy opening arguments and we'll accept $20 billion, which is a deal. And can you buy any company if you try hard enough and have enough money?

0:04:30 Andrew: All right.

0:05:08 Andrew: So I, I, love that. I want to explain what actually has happened, um, I'm going to skip ahead to the punchline, right, which is, if you were asking, does Elon Musk own Twitter right now? The answer to that is no. If you were asking, could things happen in such a way that Elon Musk would not own Twitter? The answer to that is not only yes, but a surprisingly larger range of possibilities for yes, then I would have thought before I dug through this document.

0:05:40 Thomas: I haven't heard anyone talking about that. And I am excited to learn what that is.

0:05:42 Andrew: Yeah, And, and again, I don't want to get your hopes up or whatever. I view this episode as the equivalent to our episode on Will Smith and Chris Rock, everybody right? Has opinions about Elon Musk. I have shared some of mine. I will leave in the show notes the Current Affairs April 2021 article. That was the Elon does not like the color yellow that we previously talked about. About, also a, a really good article from, um, Tech Crunch, uh, by Devin Coldaway, from two years ago, entitled "Elon, You Have No Idea What the Hell You're Talking About."

0:06:21 Thomas: Yeah. Yeah.

0:06:21 Andrew: Uh, which I, again, I endorse both of that. I

0:06:23 Thomas: That could be about a lot of things though. So like what's, because like in the wake of all this, he wants to, he's spending 40 whatever billion dollars to buy this entire platform based on a college freshman's understanding of free speech, which is just, it's what a world before

0:06:24 Andrew: Yeah yeah yeah a college a college freshman, uh, maybe in the, you know, in the hard sciences.

0:06:44 Thomas: Taking their first class. Yeah. Like an incoming freshman who hasn't taken a single philosophy class or anything like that, uh, that is to say, what is that article? What specific thing doesn't he know what he's talking about in that article? Okay.

0:06:46 Andrew: Yeah. Right, exactly. Yeah, um, so And that is about his lack of understanding of what free, free speech means. So yeah, exactly right.

0:07:01 Thomas: Okay. Could have been about tunnels.

0:07:03 Andrew: Notwithstanding

0:07:03 Thomas: Uh, space, I don't know, could have been a lot of things.

0:07:08 Andrew: That, that's our thought process on Elon Musk. You can have whatever view of Elon Musk and or Twitter and or free speech that you want, but you want to understand what this deal means. And I'd like to walk you through that. And I love your first question, which not rehearsed, right? You're putting me on the spot, but it turns out I was able to anticipate, what's the difference between Elon Musk buying Twitter and Elon Musk buying Opening Arguments, um, and

0:07:32 Thomas: Factor no, factor of about a million in terms of dollars, I donno.

0:07:33 Andrew: Yeah There's a straightforward answer, and the straightforward answer to that is Twitter's a, a public company. Right. Let's, let's drill down into what that means, right? That means that I could, while we're doing the show, buy shares of its stock on a public exchange, right? On the other hand, we were to sell Opening Arguments, a private limited liability company, to, to Elon Musk, we would have certain disclosure requirements, right? We would half to tell him stuff about the business, and he would be able to verify that that stuff is correct, right?

0:07:39 Thomas: Right. Yeah. Like Here's what Andrew's audio file looks like each week, it's a mess. Oh, God, God, Elon, let me tell you. No, I'm just kidding.

0:08:11 Andrew: It But that's right, like it's not just a sort of like, let the buyer beware, right? Like we have, if I'm going to sell you securities, right, and that includes, right, non-public companies, right, I have to tell you stuff about that company. It depends upon who I'm selling it to. It depends upon the level of sophistication of the investor, all of that. As you might imagine, kind that of stuff takes time to put together. So now imagine that you had to put together that every time you sold a share of stock on the New York Stock Exchange, you, right? Could, it would not, it was too zero. Like it would never be possible. It'd be like, click, I want to buy Tesla stock at $800 a share. And then, you know, I would get a little response that's like, great, in two weeks, we'll, you know, so that's

0:08:44 Thomas: It would slow down trading quite a bit, I think.

0:08:58 Thomas: Yeah, so I would assume those filings are all somewhere for everybody buying or trading any shares of these publicly traded companies, right?

0:09:06 Andrew: Right. So for public companies, you, right, want people to be able to buy and sell immediately. So virtually the entirety of securities and exchange law, everything that establishes, places constraints, sets up crimes, all of those things is about disclosure, right? To give people enough information on an ongoing basis that they can make an informed decision about whether or not to buy, to place an offer for a share of stock at a certain price. That's the mindset I want you to have as we talk about securities law. And this comes from the Securities and Exchange Act of 1934, right, and that is codified 15 U.S.C. Chapter 2B. And maybe more than any other field of law, we've talked about how laws sometimes delegate responsibilities to executive branch agencies to come up with rulemaking to implement those laws.

0:10:01 Andrew: Securities and exchange law is heavily dependent on the rules, right? And so those rules are codified at 17 CFR section 240 and going forward. The major thought process that has animated all of securities law since 1934 is what is called the efficient capital markets hypothesis. I've talked about this a little bit on the show. You are free, by the way. We could spend an episode critiquing this hypothesis, but you need to understand this is the basis of the law. The idea is if the information is publicly available, it will be reflected in the stock price.

As you're thinking about that, you're like, well, is that true, in like, you know, the difference between 1934 and 2022, right? Like, you know, if we publish one article here in 1934, does that really, you know, disseminate out to the larger investing world? And the answer is yes, right, the answer under efficient capital markets theory is yes, because the idea is, suppose a particular stock is trading at fifty dollars a share and they make a public announcement, and you, Thomas, a super smart investor, read that announcement and you're like, wow, this means the company is going to double in value. And so I am willing to pay up to a hundred dollars a share

0:11:00 Thomas: Oh, right.

0:11:24 Andrew: For this company.

0:11:25 Thomas: Little do I know, it's already been insider traded up to that amount, and so it's not going to double again. Set that aside. Okay, sir.

0:11:29 Andrew: Yep. Set that aside, right? Remember the idea is everything that is, we're going to get to insider trading in a second. You then start buying up stock and you're like, Hey man, I'll pay you 51 for the stock. I'll pay you 52. I'm going to 53. And the idea is if I'm sitting there willing to sell my stock and watching, then I am going to hold out for the very best deal that I can, and you single-handedly will drive the price of the stock up to 97, 98, or so, right? And so, even though I didn't read the information, the fact that you read the information led to a change in behavior, led to dissemination of behavior in the markets. Now, would be trivially easy to, you know, sort of poke holes in all of those assumptions. But insider trading is absolutely one of those, right? And so, one of the things that Securities and Exchange Act does is tries to make it such that if there is stuff that people on the inside know that would affect how they would value the stock, you have to disclose that to people on the outside.

0:11:43 Thomas: Right.

0:12:37 Thomas: Allegedly, yeah.

0:12:38 Andrew: So the adoption, for example, the Securities and Exchange Act, this is testimony from the floor of the House of Congress, was a legislative philosophy of "there cannot be honest markets without honest publicity." Complicity, manipulation, and dishonest practices of the marketplace thrive upon mystery and secrecy. And I know that because that's been cited in numerous court opinions. The court has repeatedly described the fundamental purpose of the Act as implementing a philosophy of full disclosure. So how do we do that? A couple of things are sort of layered on top of each other. A public company has to file annual reports, that's SEC Form 10-K. So if you've ever heard the company's 10-Ks, right, that's what it is. Every year you have to list, hey, know? What were the company's sales? What were their profits? What are you have to disclose?

0:13:16 Thomas: Right? Yeah. How many tweets did you sell this year? That kind of thing.

0:13:28 Andrew: You have to disclose material adverse risks, right? So if you've been sued and it's possibly material, you have to say, hey, we've been sued, right, and you have to tell your investors that. So that's a 10-K. You have to file 10 q reports, the Q is for quarterly, same thing, right, ongoing disclosures, um, and that keeps the public up to date. It ensures that at least every three months you were saying, hey, in the past three months we got sued by X, Y, and Z. Um, and those reports are certified by the company CEO, by the chief financial officer, um, and they are certified uh under under penalty of perjury and in connection with the securities and exchange laws, which are way more than a sternly worded crunch wrap, right? Again, not suggesting that insider trading doesn't happen all the time and that people don't get away with it. But when you hear about rich people going to jail, it is almost always because they've lied in their public disclosures.

0:13:34 Thomas: Right?

0:14:27 Andrew: Now, quarterly is not enough to comply with the efficient capital markets hypothesis. So, there is, this is a section of the rules, it is 17 CFR Section 243.100, Regulation FD, and Regulation FD says whenever an issuer, right, that is a company that has stock that is being traded publicly, or any person acting on its behalf, discloses any material nonpublic information regarding its securities to any person, the issuer shall make a public disclosure of that information as provided in the section immediately below. So if I tell somebody something that would affect the stock, if I tells an insider or a third party who's considering buying us, oh, hey, you should know we got this demand letter a week ago and we're about to get sued for a trillion dollars.

Then the act of my telling somebody else means that I have to disclose that so that the public knows, so that theoretically you, Thomas, the person I tell it to, don't get an opportunity to kind of arbitrage that information immediately. So what is that public disclosure? It says, "Except as provided below, the issuer shall make a public disclosure of information by filing with the Commission Form 8-K." And I know it's a lot of alphabet soup, but an 8-K is delightful, a trim, 24 pages in six-point font that tells you all of the stuff that you need to disclose whenever there are certain events that take place.

And among those events are of an acquisition or disposition of assets, change in control of the company, or material information related to those events. So sort of put all of that together. As soon as there is the possibility, we're to talk about kind of exactly what that possibility must mean in a minute, that you could sell your stock, right, that your company is about to be taken over by Elon Musk.

0:15:38 Thomas: Right.

0:16:35 Andrew: You have to then publicly tell the SEC, hey, we're talking to Elon Musk about buying the company, and you have to submit the documents attached to your 8-K so that any potential investor can read that and figure it out. And that is what I have read. So

0:16:51 Thomas: Is this the same? Because I heard in the coverage that one of the issues here, and another reason, it's broader conversation, but it feels like the SEC is just completely inadequate and Elon Musk violates these things all the time. He pays a tiny amount of money and fine compared to what he actually makes from all these things he does, that's my impression anyway. That because he was buying up stock sort of stealthily and didn't notify someone, that he kind of got away with, and and my impression was that he's either under investigation or maybe will be penalized for the fact that he kind of God away with an artificially low stock price, because if people knew that he was trying to buy the company, the price might've gone up. He'd have to pay more for it. Is that related to this?

0:17:36 Andrew: That is related to this. And remember when I said, uh, failure to disclose or lying in your 8-Ks or in your public, uh, statements regarding an acquisition is is way more than a sternly worded crunch wrap. This is Rule 10b-5, right? So it is 17 CFR Section 240.10b-5, and it says, "It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or the mails, of any facility of any national securities exchange..." So that means to communicate today, right? If you use the internet or a phone or a computer, right, it's got to be interstate e-commerce in order to trigger federal statutes, but right, yeah, like in general if you do anything and it, it hits any of these three characteristics: (a) to employ any device, scheme, or artifice to defraud; (b) to make any untrue statement of a material fact or to omit to state a material act necessary, necessary, in order to make the statements made, in light of the circumstances under which they were made, not misleading, right?

Sorry, or to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security. That's really, really, really, really, really broad, right? And so certainly one of the things that that that could happen as a result of an SEC investigation would be failure adequately to disclose the interest in the level of investment, that sort of thing, to the public.

0:19:16 Andrew: Public, because the idea on the efficient capital markets hypothesis is not just we want to make sure when Twitter is sold that it is sold at a fair price, but also that the trading price, right, because people are buying and selling Twitter as we speak yeah, as I listen to this, that the, that the trading prize reflects the accurate information available to to an outsider, to to somebody not a party to any of these transactions, to evaluate the health and the value of the company. And that's what the SEC, that's the Securities and Exchange Act of 1934, is meant to do.

0:19:32 Thomas: Every second, yeah.

0:19:55 Thomas: So how, have I heard it incorrectly or how is that burden then on Elon Musk? Because that sounds more like Twitter has a responsibility to report if like someone's trying to買 them. But if he was going around buying a bunch of stock kind of stealthily, does he also have some sort of obligation there or did I just hear that wrong?

0:20:13 Andrew: Put an asterisk by Musk's responsibilities because does in connection with the deal with But as a freestanding investor, you are correct that the burden of this falls on Twitter to make the disclosure. Item 1.01 on that form 8K requires disclosure whenever you, as a company, enter into any material definitive agreement outside the ordinary course of business. And you might be saying, all right, what the hell is that? And the answer is, we used to know exactly what that was. And then the Supreme Court during the Reagan administration decided to change the rules on us. This may be a theme that goes into next Tuesday's discussion with Andrew Seidel.

0:20:17 Thomas: Okay.

0:21:09 Andrew: But I'm going to tell you a little bit. This is the most important case in the area. It is a case called Basic Inc. versus Levinson, from 1988. And here's the story. The story was Basic Inc.'s was a publicly traded company. They made chemical refractories for the steel industry. And then starting in the mid 1960s, there was a company called Combustion Engineering that that made aluminum refractories, and they wanted to buy Basic.

Okay, they didn't, in the 1960s, because antitrust law meant something back then, uh, and the idea was a look, like the major player in aluminum refractories can't acquire the major, fact the major play in steel-based, uh, refractories. So, uh, they, you know, they kind of talked about it, but uh but it never went anywhere. The mid 70s that restrict, antitrust restrictions had been changed. Law was gradually trending towards more corporate acquisition. And so Combustion Inc. said, hey, well, we're to go back. Remember, we've been thinking for a decade about buying Basic Inc. goingto pursue that very seriously. So internal document, they created something called a strategic plan in 1976, and it included as one of its objectives, acquire Basic Inc. for $30 million. So in connection with that plan, Combustion Engineering had meetings. They had telephone conversations with Basic, with the officers and directors, and they said, hey, would really like to buy you out. As Yeah. A result of that, lots of people kind of heard the rumors and started buying basic stock, which drives up the price of the stock.

0:22:47 Andrew: And so this is kind of one of the dilemmas that hits you as the board of directors of a publicly traded company. Company, both companies now kind of have an incentive not to let this information get out, right? Because the more, because think about it, like it's trivially easy for me to say, oh, well, you know, so-and-so is interested in buying us. Well, you Know, interested could mean, you Now, anything from, yeah, right, exactly, right? And so you have a natural inclination to sort of want to keep your business deals private because they might not come to fruition. And so if you've artificially propped up the value of the stock, then, you know, your stock's going to take a big hit when that deal falls through. So BASIC went a little beyond that in 1970. This negotiation took two years. But. But in 1977 and 1978, when asked directly at shareholders meetings, hey, are you engaged in merger negotiations? They were like, nope, definitely not. And then December 18th, 1978, this is option for companies. But is no longer, I think, common practice the disclosure requirement.

0:23:14 Thomas: Yeah.

0:24:02 Andrew: So on December 18th, 1978, Basic told the Securities and Exchange Commission and the New York Stock Exchange, hey, we want you to suspend trading on our shares because we're about to make an announcement that we have been, quote, approached by another company concerning a merger. And we haven't prepared the full disclosure statement for that. We want everybody to have the opportunity to be in or out, you know, on its own basis. So stop selling our stock and allow us to make that disclosure so that we're above board to everybody. And that was that December 18th, 1970. That was the day in which BASIC from its perspective had what they considered to be a firm offer in hand. Right. Everything before that was, you know, they thought sort of preliminary.

0:24:48 Andrew: So they felt comfortable not disclosing, not talking about it. December 19th, the board voted to allow Combustion Engineering to offer $46 a share for Basic stock, and then they, the New York Stock Exchange, okay, you can resume you trading us again right now, as you might imagine, lots of people who sold their stock between 1977, 1977 and 1978, when the announcement got made at much lower rates, right in the 20s, decided that they were going to bring a class action and say, look, like, had we known that they were talking to Combustion Engineering at this time, you made the announcement, it was 46 bucks, I sold it at 25, I never would have sold at 25. If I knew there was an offer being contemplated at 46. So they sued, and they won. And they went up to the Ninth Circuit and the Ninth Circuit got affirmed. And then it went to the Supreme Court and the Supreme Court reversed and the Supreme Court replaced what was at the time a bright line rule.

And that bright line rule was information becomes material by virtue of a public statement denying it. Right. So, Hey, are you in merger negotiations? No. Okay. At the moment that you say that, that That is now a material statement about your company, right?

0:25:27 Thomas: Yeah. Yeah.

0:26:14 Andrew: Because it's something that a shareholder has asked about, and it is something that you have denied. And so now you are responsible for the content, the informational content of that statement the minute somebody asks something and you deny it. That used to be the rule. The Supreme Court said, we think you ought to be able to lie to your Shareholders. Shareholders, um, the question was a question of materiality, right? So, for example, let's, let's give it, let's give a trivial, let's steal, bot the other side, let's give a trivial example, um, I, as shareholder, ask at the company shareholder meeting, do you have any knowledge of theft within the company by its employees? And the company knows that, you know, like Jane and accounting steals a stapler every six months. But, right, I know that the gravamen of your question is, you know, corporate espionage and, and,

0:26:14 Thomas: You would think.

0:26:28 Thomas: Yeah, because Right.

0:27:04 Andrew: You know, and so I say, right.

0:27:06 Thomas: Well, we already have the concept of materiality and all this stuff.

0:27:09 Andrew: Well, but so now the question is that that's exactly right. Now the question, what makes a proposed—remember, the question was, are you engaged in merger discussions? And the question is, what makes that a question of materiality?

0:27:25 Thomas: I guess it would be if you're involved in material merger discussions, I don't know. Yeah.

0:27:27 Andrew: At—well, but suppose that the argument that was made at oral arguments, it's not reflected in the Supreme Court decision, but it is reflected in how deals get done today, is basically sort of a classic risk analysis where you multiply the probability times the magnitude, So right? The magnitude by itself of acquiring the company will always be material. And we should add, by the way, materiality is under 5% from an accounting perspective is considered not material. Anything over 10 is considered per se material.

And anything in that That five to 10 range is sort of a case by case basis. So as you're thinking about this, you're thinking 5% of the value of the company or 10% of value of company, something like that. Obviously, buying the whole company is material in terms of its consequences. But what if there's only a 1% chance that that deal is going to come through? Do we really have to disclose every single time somebody sends us an email that says, hey, man, could I do that right now and trigger or a series of disclosure requirements. I'm just going to write to Fox News every day and say, hey, man, you interested in selling Fox News? Right, the Supreme Court said, yeah, we're going to come up with a case-by-case basis. We're getting rid of the per se rules.

There's no hard and fast line because you have this sort magnitude times probability calculation. If there's a substantial likelihood that a reasonable investor investor would consider the information important in making an investment decision by significantly altering the mix of information available, then we're going to say you have a duty to disclose that.

0:28:21 Thomas: Yeah.

0:29:08 Andrew: And if you're asking, what kind of guidance does that give? The answer is not much, right? Because, yeah, that's just loaded with it's going to be a case by case basis. And, you know, as we've talked about, that means I as a lawyer cannot advise you, you certainly times when I can say this is definitely on one side, this is definitely on the other side, but the question is, when does it cross over? But this is why the Musk offer was publicly disclosed.

0:29:38 Thomas: Guess I was confused because this facts of the case you described sound like it, it was definitely material.

0:29:44 Andrew: And And it feels like it should be, uh, and essentially what the court said, let's let's be clear on the holding

0:29:49 Thomas: Said forget all the facts of this case. Sorry, preview for later.

0:29:50 Andrew: Uh So the court said we're going to remand this back to the Ninth Circuit, uh, to conduct some more fact finding to to figure out when this crossed the line to become probable. Because you didn't ask that question, right? Just said, if a shareholder says, hey, are you engaged in settlement negotiations? Are you engaged in selling the company? The minute they ask a question and you deny it, it becomes material. We're getting rid of that rule. So you now have to say, hey would that material misrepresentation changed the reliance of a reasonable shareholder at the time. And again, can't be justified by the fact that it did, in fact.

0:30:08 Thomas: Okay it did eventually go through. Yeah, yeah.

0:30:35 Andrew: That's right. And, again, that's fair. That is fair because, you deal could have been 50-50 and it happened, Like, right? So, you know.

0:30:36 Thomas: That's fair. Well, but I thought the threshold was like 5%. Is

0:30:44 Andrew: Yeah. No, that is right. So, you are sort of thinking about that sort of impact calculus, let's write probability times magnitude.

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0:32:38 Andrew: So with all of that in mind, here's what Elon Musk and Twitter have signed a deal to do. Okay, they have signed the deal that involves exchanging the assets on October 24th of this year, uh, and that can be extended by six months if there are antitrust or other government regulatory issues, so could be April of next year, but will not be before October 24th, 2022. And here's what it is. So the first is this is a merger. Yeah, I know, right. And and I would differentiate a merger from from from a corporate acquisition standpoint, it's actually more complicated than that, right? So we're to get to it in a second.

0:33:22 Thomas: It like Twitter is merging with Elon Musk's sole prop?

0:33:30 Thomas: Well, no, that was a joke. That doesn't sound very complicated, but okay.

0:33:33 Andrew: Yeah. May have, if you've watched, various financing movies and the like, you may be sort of loosely familiar with the concept of a hostile takeover, right. This is not a hostile takover. So let me define what a hostile Hostile takeover is hostile. Takeover is when you bypass a company's board of directors and you go directly to the shareholders and you say, hey, I would like to buy out your shares for X dollars. Right. That is called a tender offer if you're offering cash or an exchange offer, if you're offering shares of some other stock. And there are conditions. These were exploited in the 1980s. There are conditions under which it's relatively easy to acquire majority control of a company by tendering directly to the shareholders, right? Super easy to imagine what that is. Stock is trading at ten dollars a share. You go to the shareholders and they're like, hey, how'd you like fifteen dollars a share for your stock? The shareholders are like, yes, absolutely.

0:33:44 Thomas: Right. Right. Yeah.

0:34:35 Andrew: We would like that.

0:34:35 Thomas: And as long as you cobble together 51% or whatever, then that's a hostile takeover. Okay.

0:34:39 Andrew: Yeah, because and what makes it hostile. Right. This is like, you know,

0:34:45 Thomas: As you say, permission to treat the Elon Musk is hostile, your honor.

0:34:48 Andrew: What makes it hostile is procedurally that you are bypassing the board of directors and a vote by the shareholders. You're just going to them directly saying, I'd like to buy your stock and I don't give a damn what the board thinks about that, right? And you don't have to give a damn with the board things about that. And that's what makes it hostile. The downside is you're not going to get 100% of the stock, right. There will be holdouts. And so you will be left with majority control, but minority shareholders who hate you. And then you would have to do an entire separate, probably multi-part episode on dealing with minority shareholders. We're not going to deal with that. The way to get 100% control of a company is to effectuate a merger. And the most common, in the language, is what we have here, which is called a reverse triangular merger. Here's how it works. Elon Musk creates two companies. In this case, they're called X Holdings 1 Inc. and X Holdings 2 Inc. And X Holdings 2 is a wholly owned subsidiary of X Holdings 1.

0:35:18 Thomas: Yeah. So That's not the

0:35:52 Andrew: Twitter, it very well could be, right? There's actually an X Holddings 3. We're to talk about that as part of the deal. But Twitter is merged into X Holdings 2. Okay, so those two companies become one. X Holdings 2 survives the close and Twitter is dissolved at the close. X Holdings 1 pays the Twitter shareholders to merge their assets into X Holdings 2. And then at the close of the deal, you have a simple structure where X Holdings 1 now owns X Holdings 2, which is the former Twitter.

0:35:52 Thomas: Name of his third kid or whatever. Okay. And This sounds like a real gimmicky way to get around something. Like like, that that doesn't sound like a natural business transaction that would occur in day-to-day business life. And

0:36:39 Andrew: It is to get around the problem of holdouts. And so in order to approve the merger, you have to have the approval of the board of directors and a majority of the shareholders. So that's the first thing to consider. Now as we're about to kind of, like, I know I've talked a lot about the law, but now as we've kind of hanging the meat on the bones, the very first thing that has to happen for this deal is the shareholders have to approve it. If you own Twitter stock, you're entitled to vote. No.

0:37:13 Thomas: Is there an electoral college, or is it it just a straight up vote?

0:37:16 Andrew: It's a straight up if you have

0:37:17 Thomas: How do you, how does that happen, Twitter?

0:37:18 Andrew: So They they call a shareholders meeting.

0:37:21 Thomas: Poll? Oh.

0:37:21 Andrew: Yeah, uh, and what they do is they distribute what is called a proxy statement. So you literally get a ballot in the mail if you owned Twitter stock. And you might be sitting there thinking, like, well, what's going to determine whether people people vote for or against it? And the answer is, do they think being liquidated of their stock at the purchase price, which is $54.20 a share, is worth doing? And how do you figure out if it's worth doing? Well, you look at what the stock is doing right now, and right, the stock is bouncing around between $50 and $52 a share. So the first thing about that that's really interesting to note is, um, the fact that you could buy Twitter right now, for, as we're recording this, for fifty dollars a share, reflects the fact that the market has priced in uncertainty into this deal, right, because think about it, if you had, um, now there is

0:37:22 Thomas: Yeah. Uh-huh. Right.

0:38:16 Thomas: 100 certainty that you were going to get 54 a share, you could buy a lot of shares that, I don't know, 53, and still make a small sum. Yeah.

0:38:16 Andrew: Yeah right Now you can buy at 50 and and you will be guaranteed, guaranteed, to cash out at 54.20 if the deal goes through. So, you that 420 is a pretty, that's an eight percent premium. Right. That's a pretty healthy return, for a six month time frame. So the fact that everybody hasn't lined up to do that, right, and driven the cost of Twitter up to about fifty four dollars a share, reflects the fact that professionals in the marketplace have come to the same conclusion I have, which is this might not happen. So, um, and again, uh, super easy, if Twitter goes over 54 20 share, why, why would you ever do that? Um, so this, the first thing that struck me about this was nobody is talking about the need for shareholder approval.

0:38:25 Thomas: Yeah. Yeah.

0:39:05 Thomas: How did I know, like, it seemed like this got got quote unquote approved in a manner that seemed impossible to have gone through a balloting thing that you're talking about.

0:39:20 Andrew: It it has not gone through the balloting thing. It has been approved by the board of directors This

0:39:23 Thomas: Yeah. Okay. So they get to do like a preliminary kind of approval, assuming that they represent the majority of stockholders.

0:39:32 Andrew: Is why the deal was signed on April 24th but doesn't close for six months because you say we're going to do X, Y, and Z, and both sides have to do stuff to make the deal happen. The biggest thing Twitter has to do is they have to, number one, continue to run the business business appropriately, which presumably they will do. And number two, they have to get shareholder approval and make sure that there's no government holdups as well. And all of those are in the covenants section, right. So as Twitter is moving to close, that's what they have to do. They have to make sure there are no material adverse changes to their business, and they have to make sure that they get approval by the shareholders. Elon Musk also has to do stuff, and, right, the biggest thing is Elon Musk has to raise $44 billion. And you might be sitting there thinking, well, I read that he's worth, you know, a hundred and some billion dollars.

0:39:39 Thomas: Oh

0:40:28 Andrew: So that doesn't seem like it's going to be that hard. Put a bit in that because we're going to talk about financing. As it turns out, even for Elon Musk, raising $44 million is hard. So, yeah, the second way in which this could fall through is if either of the sides don't do the things that they have to do to get the deal over the finish line. Now, first kind of sub question that you might ask is, what if one of the other side just changes their mind? Right. What if they're like, yeah, you know what? We're six months out. I took a look at all this, and I've decided I don't want to own Twitter anymore.

0:40:36 Thomas: Yeah. Yeah,

0:41:07 Andrew: Right. Could either side, or what if the board says, we've, thought about this, we've read the newspapers since you tried to acquire us, and we've decided we don't want to be owned by Elon Musk. Could either side just kind of back out? And the answer is, it's contract, you can always just back out, right, correct,

0:41:23 Thomas: Well, Let me quick clarify. Sorry. When you say we don't want to be owned by Elon Musk, done. Like if he buys it, unless I'm misunderstanding, they're not being owned by Elon Musk. They're just taking money and leaving, right?

0:41:35 Andrew: Uh, although some, some folks who sit on the board of directors, wait, I don't you could, you could, it, you could envision individuals who both own stock and work for Twitter right, correct, yeah, yep,

0:41:41 Thomas: Might stay on as something. Sure, sure, sure. But to the average Twitter shareholder, let's say, right now, it's not like, oh, now this thing I own will be driven by Elon Musk. It's no, I'm taking a payout and don't have any stake. Okay. Just clarifying.

0:42:01 Andrew: You will have, you will own nothing at the, no no, no, it's really, really good that you clarify that, because I've mentioned before, oftentimes the offer, right, is an offer of stock in the new company, Or, yeah, yep, well, going private means you are not doing that, right.

0:42:14 Thomas: Oh, Oh, interesting. Well, even if it's going private? Oh,

0:42:20 Andrew: It means you aren't cashing everybody out. But you can, correct, you could, but you could acquire a company, and this happens all the time, So buys out, you X computer company and the tender price, right, which then becomes an exchange price, is not, you know, I'm going to give you, you know, $X per share, but rather I'm going to give you X shares of Microsoft, right? And you might imagine that this becomes actually additional inducement for

0:42:21 Thomas: Gotcha. Okay. So Elon's not doing that because he's taking it private. Okay.

0:42:54 Thomas: Hmm.

0:42:54 Andrew: The shareholders to approve the deal because if you're looking at, hey, we get to exchange XYZ Corp stock for Microsoft stock, typically you might think of Microsoft stock as being more inherently worthwhile as an investment than sort of the volatile XYZ corp. So. So, yeah, it in some cases, the acquisition may include an evaluation of the ongoing health of the surviving entity, right? Even in that sort of reverse triangular merger. And in that case, you would be merged not into some nonsense holding company that's owned by another nonsense holding holding company, but you would be merged into a holding company that's parent is Microsoft or IBM or whatever, right? So in other words, you don't have to have, all you have to have is a parent company. There's nothing inherent in the merger process that says the parent company is also made up. That's just a function of this particular deal. Yeah. OK.

0:43:03 Thomas: Right? Yeah. Right, right, right. Mm-hmm. Saying, what if they change their mind, I think, when I interrupted you. So what if the board says that? Yeah.

0:43:55 Andrew: Yep. And I said, it's contract, right? The contract defines is a legal relationship that is unbreakable. And the answer is you could break contracts all that all you want. But the question is, what are you responsible in damages if you break the contract? And that end, most acquisitions will specifically define the amount of damages that either party is owned if the other party just backs out. You want to take a wild swing at the this is this is called the termination fee in this agreement. You take a mild swing at what the termination fee is in this agreement.

0:44:08 Thomas: Yeah. Mm, right?

0:44:34 Thomas: For which party? Is it for the same for both?

0:44:36 Andrew: It is the same. I will tell you it's this is a hint. It's the same for both parties.

0:44:38 Thomas: Ah. Hmm. A wild swing? I don't know. Yeah, I don't know. A billion dollars? No idea. Yeah.

0:44:43 Andrew: Yeah, exactly. Bullseye right on the $1 billion, which is a lot of money.

0:44:46 Thomas: Oh, okay. Billion dollars. Yeah!

0:44:54 Andrew: And so that's a pretty major incentive not to change your mind. On the other hand, and certainly a pretty mayor incentive for Elon Musk, it's less so for Twitter. And just kind of of simple math does that twitter right Has 800 The Company Pays That

0:45:08 Thomas: Yeah, who pays that? The actual company? Because the shareholders would be the ones that like, or the board or whoever canceled this contract and yet the company itself. But I guess that's reflected in their like joint ownership of the company. Okay, that's interesting.

0:45:12 Andrew: Yep Yep Yep, that's right, and there were 810 and 10 million shares outstanding of Twitter and So a buck and a quarter In the share Price pays for that billion dollars, right, and we're gonna, we're going to get to that. So could either side just kind of give up and pull out? And the answer is yes, if they think it's worth a billion dollars to them. Right. And again, let's be really, really clear on that. Yeah. If Elon Musk thinks he's going to lose two billion dollars by buying Twitter, he absolutely will pull out and then there will be a 10 year litigation fight in which, you know, the Covingtons and Burlings of both sides will be engaged on both sides in in parsing this agreement as to, you

0:45:29 Thomas: Yeah Right Hmm Could be Oh God God So another billion dollars in attorney's Fees basically

0:46:16 Andrew: Yeah, there will be there will be $50 million in attorney's fees over whether he has to pay the billion dollars 10 years from now. So yeah, like there are a lot of conditions under which you would say, yeah, I'm gonna fine. I'm going pull it out.

0:46:17 Thomas: Yeah But Not to Mention What that would do to his outstanding stock that he, I think he bought like 10 or something, right, just He could lose another chunk there, hmm

0:46:37 Andrew: Yes. Yep. And but I want to make think this is important. The termination fee is individually and personally guaranteed by Elon Musk. So in other words, it can't just kind of come out of the entity or this business deal or whatever. At the end of the day, they have the right to go after him and his own pocket if he just backs out. OK.

0:46:49 Thomas: Huh

0:47:00 Andrew: So a couple of other things. I mentioned what if the shareholders are like, oh, we're reading all the press and like the board says, yeah, no, this this this guy's awful. Let's not sell to him. And then reverse their course. And the answer, this one I think is very, very unlikely because it is about assessing the risks as the board of directors. And as a board of directors, you have a fiduciary duty to your shareholders. That fiduciary duty can be described as one thing and one thing only. That is to to maximize their return on their investment. That's it. So when you bring a lawsuit as a shareholder, these are these can be direct or can be derivative actions.

0:46:58 Thomas: Interesting Interesting

0:47:48 Andrew: That's subject for another show. Your allegation is the board acted in such a way as not to maximize our shareholder wealth. And we talked about this, for example, in the Mick Mulvaney Sears case. Right. Like if you sell off all the assets of a company and then they

0:48:04 Thomas: Yep Yep And They Totally Got away with that, so I Guess these rules Aren't strong enough

0:48:11 Andrew: Totally got away with it. These are challenging lawsuits to maintain. The point is, is that any transaction that you take that is transparent like this, right, you will get $54.20 a share. You could certainly go back and say, you know, we think we'll get more than 55.50 a share, that would be the 54.20 share price plus the billion dollars in penalty, billion dollar penalty that you have to pay to Elon Musk. By doing X, Y, or Z. And the board would be roughly insulated from lawsuits by shareholders, right? Because of what we call the business judgment rule. And, business judgement rule says that if a board of directors acts in good faith with the care that a reasonably prudent person would use, with the reasonable belief that they're acting in the best interest of the corporation, then we defer to their actions, right.

0:48:13 Thomas: Yeah

0:49:05 Andrew: Right. And that gives you wide latitude for, you know, really introduced new Coke. Right. Like, yeah, because we want businesses to experiment and, you know, and to say, yep, I introduced new coke. Here was the reasons. Therefore, no, nobody was nobody was was civilly liable for that. Right.

0:49:11 Thomas: Damn So Nobody Was charged Criminally for that, that sucks

0:49:28 Andrew: So Coke's defense. Were, they sued, of course. But their defense was that the Pepsi challenge revealed that they were losing market share because the the formula for Coke was not sweet enough. So they wanted to reformulate it, make it sweeter. And they put a ton of research into it. And they proved under the business judgment rule.

0:49:28 Thomas: Yeah So they Were Actually Sued For this, this dumb idea, like I This was so bad that, wow I Was Just joking, that's awesome

0:49:48 Andrew: Absolutely. Yeah. Yeah, no, it's remember, if rich people lose a lot of money, I can promise you There will be a lawsuit, suit

0:49:52 Thomas: Yeah That's True So Going Back to this, this is, this is what's interesting to me, and maybe this will clarify all point you're making, the board has apparently had the power to kind of preemptively or preliminarily agree to this on the behalf of the shareholders who then later on have to vote for it. So Isn't it weird to have a backing out penalty that are liable for if maybe let's say the board was just flat out wrong about what shareholders would want to do, you know, and they're like, yeah, we'll do this. And then 20% of shareholders vote in favor of it. Then they all, all the shareholders have to pay that, you know, buck, whatever to come up with that billion dollars that the, that essentially means the, the board messed up.

0:49:58 Andrew: Yep So I'm glad you asked the question because I I want to clarify, approval by the board is a condition precedent that does not trigger that billion dollars. Right, if The shareholders

0:50:51 Thomas: Oh, so we're not to the point yet.

0:50:52 Andrew: Yep Yep If The shareholders Vote against it, then the Deal's Just Done That's Right, um, and Yeah And so that's why I listed that as as one of the risks. Now, we're going to talk about in which this deal constrains that. And in fact, I'm going to talking about that right now. This is Section 6.5, says that the board in the time period between now and closing shall not do a bunch of different things. Right, and one of the things, uh, that they can't do in Section 6.5 D1A is they may not publicly recommend that the company's stockholders vote against the adoption of this agreement, they

0:50:54 Thomas: Okay. Okay, okay. Then there's just no deal oh that's very interesting hmm Andrew

0:51:37 Andrew: May now make any public statement or knowingly take any action with a similar intent, purpose, or effect, or approve of or recommend or propose publicly to approve or recommend any competing proposal, right? So, uh, and I'm to define what competing proposal is in a minute. So So, so board has to publicly be in favor of the deal. They have to convene the shareholders meeting, which means gaining proxies because, you know, you're not, you're not actually going to travel out there. You're going to fill back a written ballot, right, of how you vote your shares. And if you fail to do that, right, the proxy agreement will then describe how the, how the board gets to vote your shares. Right. There was a lot in that, right, but basically the board has to use, this is, this falls a little shy, like you could have put in, the board must, in good faith, right, lobby in favor of the deal. You, right, must use all good faith efforts to convince, convince the shareholders to vote in favor of the proposal.

0:52:34 Andrew: This doesn't say that. This says that they can't come out publicly and say, yes, we have agreed to this. You should vote it down. And we're to talk more about what the board can do in a minute. In that sort of box of ways in which this deal could fall through, the shareholders could vote it out. And that strikes me as a second sort of plausible path that, you know, would not necessarily require, you knows, heroic efforts between now and then

0:52:52 Thomas: I would say though, it feels like Elon Musk is way overpaying for Twitter, honestly. And that makes me think that shareholders would be pretty nuts to vote this down.

0:53:08 Andrew: It. It is certainly a a perspective, right? But remember, again, the premium here is you five to eight percent, right? We are not talking about

0:53:22 Thomas: Well, look at it another way. The share price in March, which is all of a month and a half ago, March 8th was $32. So it depends on what you think the outlook for Twitter is. If you think it's a company destined for greatness after this, you know, but, but like based on March, I mean, he's massively overpaying for it, uh, based on looking at one way, you know, so I, who knows? I, it depends on what outlook you take, I think.

0:53:24 Andrew: Yeah no absolutely absolutely and we should say, uh, that the first quarter earnings numbers, uh, that were reported by Twitter, uh, were described by analysts as mediocre. Their sales were $1.2 billion in advertising, which were below what the analyst forecasts were. So yes, of that is worth pointing out. We want to understand the deal sort of from all sides. Boy, I don't want to miss out on a fair amount of detail about ways that Elon Musk might bail out of the deal, what Twitter can do between now and October in terms of listening to competing repeating proposals. The financing, I've got a lot of stuff on that. So you want to handle that?

0:54:02 Thomas: Right. Oh man.

0:54:40 Thomas: Editorial decision in the moment here, we're going to do something unprecedented, I Think for the show, which is spontaneous two-parter, uh? Because as you all might know, if you're avid listeners, Rapid Response Friday is just that. It's a very quick turnaround. You know, we record it. I edit it, get everything done in a matter of mere hours. And so what we're going to do for that reason, we're a little pinned down in length of episode. It's impossible to do like a two hour that because they'll just run out of time. So here's what we'RE to DO. I got an idea. Let's do an audible bonus episode. So spontaneous two-parter here, Andrew. I think we cut it off here. We put this out at the normal time. You and I get plugging away and we work overtime here to come up with a part two as fast as humanly possible, which may be, you know, hours from now.

0:54:42 Andrew: Okay. I

0:55:31 Thomas: Who knows? As you're listening to this, it may already be out. But I think that's, what do you think about that plan?

0:55:37 Andrew: Want to make sure that everybody gets to hear everything. And I did a lot of research on this. So no,

0:55:42 Thomas: Yeah, I know. So oftentimes it's like, you know, you've got a few bullet points that you're like, all right, we didn't get to that because Thomas asked me a bunch of questions. This is like half a, yeah, there's

0:55:49 Andrew: There's a lot. Plus I got some, yeah, I have some updates that I optimistically thought I wanted to tell people about. We haven't done T3BE yet.

0:55:54 Thomas: So much. I'm not even, I'm out of kindness to you, Andrew. I'm not even going to tell people about some other segment you had listed in here that you somehow thought we were going to get to. Let's do this. And we'll do patrons and T3B on the bonus one because. And I think that'll work out for everybody. We get bonus OA. Don't you love bonus OA? Who doesn't?

0:55:58 Andrew: Okay.

0:56:15 Thomas: And it means a ton of extra work for us.

0:56:15 Andrew: All right well let's let's get this

0:56:18 Thomas: That's fine. That's fine. All

0:56:18 Andrew: Yeah let's get this out so you can edit and then let's get let's let's get recording that bonus episode now

0:56:19 Thomas: Right. Well, what an interesting ending to the show. So, unlike we said previously, the next episode will not be Andrew Seidel. That'll be the one after this that comes out on Sunday night for patrons and Tuesday for everybody else. The next episode now will be part two of Elon Musk buying Twitter. There's so so much more to talk about. I'm seeing Andrew's notes. There's tons of pages left and also some other updates that we wanted to get to you. So that'll be a ton of fun. Bonus OA. Can't wait to see you then.

0:56:50 Clip: I move for a bad court thingy. You mean a mistrial? Yeah, that's why you're the judge and I'm the law talking guy.

0:57:24 Clip: www.openargs.com. Be sure to join the Facebook group at facebook.com slash groups slash Yodel Mountain and follow us on Twitter at OpenArgs. This podcast is a production of Opening Arguments Media LLC, all rights reserved. It is produced with the assistance of transcriptionist Heather Leverage, production assistant Ashley Smith, and additional contributions from Morgan Stringer and Debra Smith. Special thanks to Teresa Gomez, who runs our live shows and heads up the OA Wiki, follow at OA Wiki on Twitter. Additional thanks to the moderators of the Opening Arguments Facebook community, Emily Waters, Alicia Cook, Eric Brewer, Natalie Newell, Brian Ziegenhagen, and Teresa. And finally, thanks to Thomas Smith, who edits the show and created the fabulous theme music, which was used with permission.