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It is hard to write on this without taking sides. Let's just say I share your intuition about this hypothetical real estate transaction but I am not convinced

It is hard to write on this without taking sides. Let's just say I share your intuition about this hypothetical real estate transaction but I am not convinced that it is an appropriate simile. As I read it, his claim is that he didn't waive inspections but relief on the prior inspection report which he is beginning to question. But whether even that is the right metaphor almost doesnt matter. I think we would have to be steeped in what the standards are in the industry to have a productive discussion. This is where someone in HN says: I am an M&A lawyer for 30 years and there are four standards. The X v Y standard whereby the effect of the change has to be material but material is not defined, however... (Matt Levine has, as always, my favorite elucidation)

mikeyouse 4y ago
Yeah, there's a few different discussions with Levine and others on Twitter - but what Musk is asking for is generally governed by an information covenant - but the covenant in his offer is extremely weak in terms of governing the deal... https://twitter.com/nycsouthpaw/status/1533820324214611969 https://twitter.com/nycsouthpaw/status/1533820324214611969 What Levine is referring to is that the deal is subject to Twitter not making any representations that amount to "material adverse effects" which is a very high standard that Twitter definitely hasn't broached -- but financing statements are often subject to detail that covers "all material respects" which is a much more broad standard that Elon could plausibly litigate. It's deeply cynical on Elon's part - he knows what he signed and he knows what he got himself into - which is why he's doing this dumb dance to back out now. It might even work, but it's against the spirit and (IMO) the letter of the contract. He's relying on section 6.4 to make his case that they need to provide him the bot detail - it's short and sweet: https://www.sec.gov/Archives/edgar/data/1418091/000119312522120461/d310843dex21.htm https://www.sec.gov/Archives/edgar/data/1418091/000119312522... But he's clearly going to use what they provide him to attempt to back out of the deal which is explicitly against the terms of that section.
- omarhaneef 4y ago
  okay, you seem to know at least as much as I read, so let me ask you this question: "material adverse effects which is a very high standard that Twitter definitely has not broached" I guess my question is how do we know -- from the outside -- that they definitely have not broached it? Elon seems to think the bots issue (roughly, that they miscalculate it) does broach the standard. Everyone I have read thinks seems not to think so and shares your view. But for a naive person on the outside, couldn't it be plausibly argued that this bot thing is a material breach? I am in the awkward position of not knowing either party. I take each at their word, and the dispute seems pretty "sensible" to me.
  - mikeyouse 4y ago
    Yeah that's fair, it does seem sensible from the outside - but the "material adverse effects" standard is an incredibly high standard. All US Corps are organized in Delaware basically because all US corps are organized in Delaware (giving them a long history of well-understood and litigated corporate law). The "material adverse effect" standard isn't that the bots would have a materially adverse effect on the deal or transaction, but that they'd have a materially adverse effect on Twitter's profitability for a long duration. Levine laid it out already; > That is an incredibly high standard: Delaware courts have almost never found an MAE. An MAE has to be something that would “substantially threaten the overall earnings potential of the target in a durationally-significant manner,” the courts have said; there is a rule of thumb that an MAE requires a 40% decrease in long-term profitability. If it turned out that 6% or 20% or 50% of Twitter accounts are bots, that will be embarrassing and might even reduce Twitter’s future advertising revenue, but will it be an MAE? No. “Pending details supporting calculation” is not how this works. This disclosure — that “the average of false or spam accounts ... represented fewer than 5% of” Twitter’s monetizable daily active users — has been in Twitter’s securities filings for many years, always with a caveat that “in making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated.” Musk had the opportunity to read these filings before offering to buy Twitter, and he had the opportunity to do due diligence on these numbers before signing the deal. (He declined.) He can’t now go to Twitter and say “actually now you need to prove that your user numbers are right.” If he wants to walk, he has to prove that they’re wrong, and also that they’re wrong in a way that has a material adverse effect on the business. Which he obviously can’t do. Advertisers don't really care about how many bots are on Twitter - at least not in the way you might naively expect them to care. Of course they want their ads to be shown to humans, but over a long timeline, it doesn't actually matter what percentage of their views are to humans or bots - only the performance of those ads. If you spend $1 on 100 ads and it leads to $1.25 in sales, you don't really care if it was shown to 95 people and 5 bots, or 90 people and 10 bots, or 50 people and 50 bots. There was a positive ROI for your campaign, so you're going to do another one. You'd prefer it was shown to 100 people and 0 bots, but everyone in the business knows the bot problem is an extremely difficult one to solve, so you just weigh relative performance and adjust the price you're willing to pay while maintaining that ROI. It's silly for Musk to claim that the deal can't go through because he needs to know how many bots are present to determine potential advertising revenue because he knows how much advertising revenue they have today, regardless of the specific percentage of bots -- if Twitter's wrong about the way they calculate bots, that actually gives the future "bot-free" platform a higher revenue ceiling because then all of the advertisers campaigns would get substantially more performant.

mikeyouse 4y ago

Yeah, there's a few different discussions with Levine and others on Twitter - but what Musk is asking for is generally governed by an information covenant - but the covenant in his offer is extremely weak in terms of governing the deal... https://twitter.com/nycsouthpaw/status/1533820324214611969 https://twitter.com/nycsouthpaw/status/1533820324214611969 What Levine is referring to is that the deal is subject to Twitter not making any representations that amount to "material adverse effects" which is a very high standard that Twitter definitely hasn't broached -- but financing statements are often subject to detail that covers "all material respects" which is a much more broad standard that Elon could plausibly litigate. It's deeply cynical on Elon's part - he knows what he signed and he knows what he got himself into - which is why he's doing this dumb dance to back out now. It might even work, but it's against the spirit and (IMO) the letter of the contract. He's relying on section 6.4 to make his case that they need to provide him the bot detail - it's short and sweet: https://www.sec.gov/Archives/edgar/data/1418091/000119312522120461/d310843dex21.htm https://www.sec.gov/Archives/edgar/data/1418091/000119312522... But he's clearly going to use what they provide him to attempt to back out of the deal which is explicitly against the terms of that section.

omarhaneef 4y ago
okay, you seem to know at least as much as I read, so let me ask you this question: "material adverse effects which is a very high standard that Twitter definitely has not broached" I guess my question is how do we know -- from the outside -- that they definitely have not broached it? Elon seems to think the bots issue (roughly, that they miscalculate it) does broach the standard. Everyone I have read thinks seems not to think so and shares your view. But for a naive person on the outside, couldn't it be plausibly argued that this bot thing is a material breach? I am in the awkward position of not knowing either party. I take each at their word, and the dispute seems pretty "sensible" to me.
- mikeyouse 4y ago
  Yeah that's fair, it does seem sensible from the outside - but the "material adverse effects" standard is an incredibly high standard. All US Corps are organized in Delaware basically because all US corps are organized in Delaware (giving them a long history of well-understood and litigated corporate law). The "material adverse effect" standard isn't that the bots would have a materially adverse effect on the deal or transaction, but that they'd have a materially adverse effect on Twitter's profitability for a long duration. Levine laid it out already; > That is an incredibly high standard: Delaware courts have almost never found an MAE. An MAE has to be something that would “substantially threaten the overall earnings potential of the target in a durationally-significant manner,” the courts have said; there is a rule of thumb that an MAE requires a 40% decrease in long-term profitability. If it turned out that 6% or 20% or 50% of Twitter accounts are bots, that will be embarrassing and might even reduce Twitter’s future advertising revenue, but will it be an MAE? No. “Pending details supporting calculation” is not how this works. This disclosure — that “the average of false or spam accounts ... represented fewer than 5% of” Twitter’s monetizable daily active users — has been in Twitter’s securities filings for many years, always with a caveat that “in making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated.” Musk had the opportunity to read these filings before offering to buy Twitter, and he had the opportunity to do due diligence on these numbers before signing the deal. (He declined.) He can’t now go to Twitter and say “actually now you need to prove that your user numbers are right.” If he wants to walk, he has to prove that they’re wrong, and also that they’re wrong in a way that has a material adverse effect on the business. Which he obviously can’t do. Advertisers don't really care about how many bots are on Twitter - at least not in the way you might naively expect them to care. Of course they want their ads to be shown to humans, but over a long timeline, it doesn't actually matter what percentage of their views are to humans or bots - only the performance of those ads. If you spend $1 on 100 ads and it leads to $1.25 in sales, you don't really care if it was shown to 95 people and 5 bots, or 90 people and 10 bots, or 50 people and 50 bots. There was a positive ROI for your campaign, so you're going to do another one. You'd prefer it was shown to 100 people and 0 bots, but everyone in the business knows the bot problem is an extremely difficult one to solve, so you just weigh relative performance and adjust the price you're willing to pay while maintaining that ROI. It's silly for Musk to claim that the deal can't go through because he needs to know how many bots are present to determine potential advertising revenue because he knows how much advertising revenue they have today, regardless of the specific percentage of bots -- if Twitter's wrong about the way they calculate bots, that actually gives the future "bot-free" platform a higher revenue ceiling because then all of the advertisers campaigns would get substantially more performant.