The Elon Musk v Twitter lawsuit is heating up

Sascha: [00:00:02] From Equity Mates media. This is the dive. I'm your host, Sascha Kelly. Elon Musk and Twitter are squaring up for their big courtroom showdown.

Audio clip: [00:00:12] Elon Musk is taking an old saying to a new level, put your money where your mouth is. Spending nearly $3 billion to buy up 9% of Twitter. 

Sascha: [00:00:21] In April, Elon Musk signed a deal to buy the social media platform for $44 billion. But months later, he tried to walk away from the deal, claiming there were too many fake accounts and subsequently Twitter has sued him to enforce the sale. Elon Musk, his lawyer, has just sent a letter to Twitter to say the deal is off. As the court date gets closer and closer, both sides are making moves. So we just wanted to check in on the court case and keep up with what is happening. It's Monday, the 5th of September. And today I want to know what is happening with the Elon Musk of Twitter lawsuit. And what do the experts say? Is Elon going to be forced by Twitter to do this? I'm joined by my colleague here at Equity Mates. It's Darcy Cordell. 

Darcy: [00:01:07] Thanks, Sascha. It's been a while since we've talked about Elon Musk, so it's time for an update. 

Sascha: [00:01:11] It does seem to be. I think at the time we joked that this show could just be what did Elon do next? And we have like we have held off from covering him too much. 

Darcy: [00:01:20] We've held off. [00:01:21][0.6]

Sascha: [00:01:21] Yeah. So, look, I'm going to challenge you to just give me a little bit of a rough timeline of where we're at at the moment, because I have been following it. But I just want to excuse anyone who's decided to tune out from the Ellen Parade temporarily. So can you give us another a timeline recap? [00:01:38][16.9]

Darcy: [00:01:39] Yeah, I'll give you a rapid fire recap. [00:01:40][1.4]

Speaker 4: [00:01:41] Twitter now has its largest individual shareholder holder, and it is a pretty familiar name. Elon Musk has bought nearly 10% of Twitter. The Tesla founder has taken a 9.2% stake in the social media platform. Kind of like need some means of getting the message out. [00:01:58][16.2]

Speaker 5: [00:01:58] Social media platforms are a key source of news, information and entertainment and so that's sort of the new sandbox where entrepreneurs want to play. [00:02:08][9.9]

Darcy: [00:02:08] So in January, Elon Musk starts buying Twitter shares. By March, he owns 5% of the company. In April, Elon becomes Twitter's largest shareholder, owning more than 9% of the company. And around that time, he agrees to join Twitter's board. But just a day later, he pulls out and decides not to. Instead, though, he offers to buy the whole company for $44 billion. And on the 25th of April, the two sides agree that Elon is going to buy the company, but then it all falls apart. [00:02:39][30.6]

Audio clip: [00:02:40] Elon Musk's legal team has sent a fresh letter to Twitter to scrap the billionaire's acquisition of the company in light of a whistleblower's recent complaints. So more clarity on some of the news that we're getting. We understand that there is a filing that includes a letter from Elon Musk's attorney saying that Twitter has not provided the information that he has been requesting now for nearly two months. And that is part of the reason why he is terminating this deal. Again, Twitter shares are trading now above $35 in the extended session, down about four and a half to 5% by May. [00:03:09][29.4]

Darcy: [00:03:10] Elon says the Twitter deal was temporarily on hold and he's tweeting about fake accounts and bots on the platform. And then by July he moved to terminate the deal to stop him walking away. Twitter CEO's and that's where we're at. [00:03:23][13.1]

Sascha: [00:03:24] So that's kind of where the world sort of tuned out of the story. The court date was set for October and then both sides went quiet to get ready for trial. But recently we've seen a flurry of activity. What has happened? [00:03:35][11.5]

Darcy: [00:03:36] So two big things have happened. A lot of big names are getting dragged into proceedings and Twitter's ex-head of security has turned whistleblower. [00:03:43][7.2]

Sascha: [00:03:44] Okay, well, Dorsey, I'm not so secret gossip, so I want to start with the big names. Can you tell me about who's being dragged into proceedings? [00:03:52][7.9]

Darcy: [00:03:53] Legal letters are flying thick and fast around Silicon Valley. On the one side, Elon Musk lawyers have subpoenaed Jack Dorsey, Twitter's co-founder and the former CEO, Goldman Sachs. They've subpoenaed and also Jp morgan. [00:04:06][13.6]

Sascha: [00:04:07] And what about on the other side who have Twitter issued subpoenas to? [00:04:10][3.4]

Darcy: [00:04:11] So they've subpoenaed Peter Thiel, Founders Fund, Marc Andreessen and David Sachs, some big names here, etc.. [00:04:17][6.5]

Sascha: [00:04:18] And that's really important. Dorsey Because a lot of those names were involved in PayPal back in the day, so a lot of them already have relationships. [00:04:24][6.6]

Darcy: [00:04:25] Yeah, that's right. So Elon Musk and Peter Teal were PayPal co-founders. David Sacks was the chief operating officer of PayPal, and Marc Andreessen actually sat on eBay's board when it owned PayPal between 2008 and 2014. So Andreessen isn't part of the PayPal mafia, as they call them, but if you haven't heard of the mafia, I've just got to tell you this story quickly. PayPal is one of the most important companies in Silicon Valley history. After PayPal, Salt, eBay, the senior employees of the company have gone on to found some huge, huge companies. That includes. Tesla, LinkedIn, Palantir Technologies, SpaceX X, a firm slide caver, YouTube, Yelp and Yammer. Some great names. [00:05:09][43.5]

Sascha: [00:05:09] Wow. Those are some big names. Okay. Well, let's keep our focus and get back to the task at hand, which is the Elon Musk Twitter lawsuit. So our first takeaway is that some of the biggest names in Silicon Valley have been getting roped in. And now we've got this second story emerging, which is all about this Twitter whistleblower. Can you give me some more information about that? [00:05:30][20.4]

Audio clip: [00:05:30] Peter Mudge As that co emerged as the Twitter whistleblower alleging that Twitter has jeopardised US national security and misled investors and regulators. [00:05:40][10.3]

Darcy: [00:05:41] He's actually Twitter's former head of security and also a former hacker. We could honestly have an entire episode dedicated to him. But what you need to know is that he came forward last week alleging Twitter has a lot of security issues. They're vulnerable to hacking. And the company's board of directors were misled about these issues. But the most noteworthy allegation you need to know is that Zack Coke claims Twitter misled the world about the number of fake accounts on the platform. So this, as you can imagine, has given Elon Musk some real ammunition. On Tuesday, Musk actually sent a letter to Twitter, which notified them he was formally adding these whistleblower allegations against Twitter as a reason for terminating his $44 billion takeover. And Musk has also subpoenaed Zuko, meaning he'll be required to provide evidence during the upcoming trial, and that's due to begin on the 17th of October. [00:06:32][50.5]

Sascha: [00:06:32] I think I can be pretty confident and say that Equity Mates office might be a little bit distracted while that's all that's ongoing. [00:06:38][6.2]

Darcy: [00:06:39] Yes, definitely. Sascha will have it on split screen for sure, but it's scheduled to be a four day trial, but it could now be delayed by about a month. [00:06:46][7.4]

Sascha: [00:06:47] Why is it possibly delayed. [00:06:48][0.9]

Darcy: [00:06:49] Just because of these new allegations? And Musk is really trying to push it back to have a little bit more time to prepare the case. [00:06:55][5.9]

Sascha: [00:06:55] Yes. So just with these new allegations, the legal teams want a bit more time to do due diligence. That's right. So things are ramping up in preparation for the trial. After the break, I want to turn to the trial itself. Is Iran actually going to be forced to by Twitter? We'll be right back. [00:07:12][16.5]

Audio clip: [00:07:15] Elon Musk is taking an old saying to a new level, put your money where your mouth is. Spending nearly $3 billion to buy up 9% of Twitter. [00:07:24][8.9]

Audio clip: [00:07:24] Musk's investment sent Twitter shares soaring about 25% in pre-market trading. Elon Musk's legal team has sent a fresh letter to Twitter to scrap the billionaire's acquisition of the company in light of a whistleblower's recent complaints. [00:07:36][12.1]

Sascha: [00:07:37] Welcome back to the dive. I'm joined by my colleague Dorsey Cordell. And today we're doing a bit of an update on the Elon Musk Twitter trial. Sir Dorsey The big question, is Elon ever going to have to buy Twitter? [00:07:49][12.4]

Darcy: [00:07:50] The short answer is we just don't know yet. [00:07:52][2.0]

Sascha: [00:07:52] That's disappointing. Dorsey I wanted a hard and fast yes or no. Why can't you come through for me? [00:07:57][4.7]

Darcy: [00:07:57] We'll get to that. I've got some more info for you. So technically, a court could enforce the deal. It could happen. But in a contract dispute like this, a court can order quite specific performance. And that's where a party that has signed a contract is told by the court they must do what they agreed to do when signing. So that would mean in this case, Elon pays $44 billion to acquire all of the shares in Twitter. All right. [00:08:21][24.2]

Sascha: [00:08:21] So your headline answer, Dorsey, is that we don't officially know. So let's look at what some experts are saying. Can you give me what the prevailing opinion is from legal minds at the moment? [00:08:32][10.7]

Darcy: [00:08:33] But very disappointing answer, but it's varied once again. DORSEY What we can look at is precedent, Sascha. And right now there is no precedent for a court upholding that specific performance clause to enforce a contract at this size. But courts have forced deals to go through previously. And one example we've read about from Delaware, which is the state that this case will be heard in, was that in 2001, Tyson Foods were forced to buy IBP for $3.2 billion. Okay. So there is some precedent, but $44 billion is a whole nother ball game. And there are some investors betting that Musk will be forced to do it. David Einhorn, he's bought up a significant stake in Twitter, expecting that Alan will be forced to pay the full buyout price. And Twitter's shares are currently well below their buyout price. So David Einhorn would be making money if the deal went through. [00:09:24][51.5]

Sascha: [00:09:25] So what happens if the court orders Elon to buy Twitter and he just blankly refuses? You know, he just doesn't want to be a part of this arranged marriage. [00:09:34][8.8]

Darcy: [00:09:34] So we have a little bit of precedent to go off here again. And it would mean that the court would have to punish Elon if he didn't go through with the deal or if he kept refusing, they could find him and then fine him some more. Brian Quinn, who is a Boston College law professor, suggested that if Musk refuses, a judge could hold him in contempt and set a daily fine until he complies. And that's happened previously. When Transpacific Global refused a Delaware court order, a judge imposed a $30,000 daily fine until they complied. [00:10:04][30.2]

Sascha: [00:10:05] But given Elon is worth more than $200 billion, 30,000 is not a huge amount of money to him. And like him that daily fine to be a deterrent is just going to have to be way bigger than that. [00:10:20][14.6]

Darcy: [00:10:20] Yeah. That 30,000 would be pocket money for Alan. [00:10:23][2.6]

Sascha: [00:10:23] Yeah. So if it if a fine won't work, is there any other options that a court might explore? Something else they might do. [00:10:30][6.2]

Darcy: [00:10:30] So if Alan Cates refusing, they might be able to appoint a receiver and start actually seising Elon's assets. Robert Miller, a professor at the Iowa College of Law, suggested that the court could allow Twitter to go after Musk's assets. And given that the case is being heard in Delaware. And Tesla is also a Delaware based company, Miller suggested that a court would have no problem reaching Musk's Tesla stock. [00:10:52][22.6]

Sascha: [00:10:53] That's really interesting. [00:10:53][0.5]

Darcy: [00:10:54] Yeah. And in that case, the receiver would be able to sell his stock to get the money to complete this deal. [00:10:59][4.7]

Sascha: [00:11:00] Okay. Are there any examples of this that you can share with me? [00:11:02][2.6]

Darcy: [00:11:02] Dorsey In the most extreme example, under Delaware civil contempt procedure, a judge can send a scofflaw. That's the actual legal term. [00:11:10][8.0]

Sascha: [00:11:11] Okay. He's learn a new word every day. [00:11:13][1.7]

Darcy: [00:11:13] A scofflaw can be sent to jail. In 2014, this happened in Delaware after a defendant refused to surrender their passport. But no one really thinks that this could happen for a contract dispute. Okay. One other thing to note, Sascha, Robert Miller suggests that the court has a vested interest here. The state of Delaware is seen as the premier corporate law jurisdiction in the US that traditionally very friendly to corporations and their jurisdiction where deals are enforced. They don't want to lose this reputation in the fallout of the Twitter mask saga.

Audio clip: [00:11:44] It was such a crazy deal to begin with. In a way, the way he's pulling out is kind of very unsophisticated with something that happens all the time in regular non billion dollar contract. 

Sascha: [00:11:54] There is one option that you've neglected to talk about and that's the other option out, which is a settlement. 

Darcy: [00:12:01] Yeah, it does seem that both sides have reasons to settle because they both face a big risk at this trial. And there's not a whole lot to gain by consummating a deal that at the moment it looks like neither side really wants. But. What the settlement could look like is still unknown. Again, looking through Delaware's legal history, there is one good example. In 2008, billionaire industrialist Jon Huntsman got into a massive dispute with private equity giant Apollo over an acquisition that Apollo decided to walk away from. There was a lot of anger around this case. And Huntsman said Apollo, quote, should be disgraced. And his son also called Apollo absolutely pathetic. But in the end, both sides came to their senses and settled out of court. In his books years later, Huntsman said letting Apollo off the hook and settling was actually for the best.

Sascha: [00:12:49] So, Darcy, I'm going to put the question to you. What's your prediction? What do you think's going to happen with the Elon Twitter saga.

Darcy: [00:12:57] In the interest of full disclosure here? I'm not a lawyer, Sascha.

Sascha: [00:13:00] So this is really just Dorsey's prediction when I won. Happening, isn't.

Darcy: [00:13:05] It? Purely my prediction. But what I do think is that this Twitter whistleblower is a big win for Allen. Allen's case really rests on whether Twitter lied to him about the amount of fake accounts on the platform. But on the other hand, I've been reading some profiles on Twitter's lawyer in the case whose name is Bill Savitt, and he's really got his sights set on Allen. The Financial Times have called him, quote, a rock star lawyer. And in another twist to this whole crazy story, he's actually represented Allen before in his Solar City case. In the end, I think Allen might get out of this deal, but we could see some serious fireworks. Again, we're not lawyers, though, so what do we know? 

Sascha: [00:13:43] I'm certainly not legally trained or have any idea about it. I do find it a fascinating story, though, and I am hooked to see what happens because it certainly as soon as you think you've got the lay of the land, another piece of information emerges. And there's something else that complicates the saying. So it sounds like it's going to be an amazing movie one day. That's all I can say. 

Darcy: [00:14:05] Dorsey is looking forward to it. 

Sascha: [00:14:07] Yeah, hopefully Aaron Sorkin or someone like that. Right. Look, if you enjoyed this episode, then please tell a friend about it. It's really important for our podcast to grow. It is the best way. That's word of mouth. And if you're listening because you've been referred, then welcome and we have a growing back catalogue. It's well worth checking out our last three episodes where we talked about Ryan Reynolds buying a football team, Russian knockoff brands and the forgiveness of millions of dollars of student debt. So go check them out. Remember, you can keep in contact with us by following us on Instagram at the Dive Drop Business News. You can write to us by email, the diver Equity Mates dot com and you can subscribe wherever you're listening right this second so you never miss an episode. Thanks Darcy, so much for giving me what's going on in the land of Ellen and Twitter. It's a murky place. 

Darcy: [00:14:53] My pleasure, Sascha.