I looked at these same provisions last night and found the bolded language in the first paragraph poorly drafted/hard to read. I'm reading the bolded portion as saying that Musk's closing condition for a false R&W can only be asserted if the false rep has a MAE.wifeisafurd said:calbear93 said:I am talking about using the no MAE closing condition to get out of a merger agreement with a public company. Until a complete outlier case in 2017 where the facts were pretty outrageous, no court had ever interpreted the MAE to permit a buyer to terminate a merger agreement. For M&A lawyers, the MAE condition was heavily negotiated knowing it would never be used (again other than the 2017 Akorn case).wifeisafurd said:I'm assuming you are talking about public takeover type acquisitions, because in different situations, the mergers can and do fall apart, as we both know. But having read the agreement, yes Musk can walk on the breach of a R&W. Will that happen - as opposed to this being white noise or causing a price adjustment - not likely. It is likely Musk wanting a better deal based on a succession of bad public announcements by the company.calbear93 said:I just want to add that other than one outlier, there has never been a buyer that has been able to use the MAE condition to terminate a merger agreement with a public company.wifeisafurd said:Your discussion in the first paragraph is consistent with the selective provisions I read in the Agreement.Unit2Sucks said:wifeisafurd said:One condition precedent to closing is no violation of reps and warranties and one such R&W was that no SEC filings contain "any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, or are to be made, not misleading." Materially misstating (in this case overstating) the number of actual users violates the contract provision (not to mention violate SEC rules on disclosure such as Rule 10b-5) and have all sorts on consequences. If this is true, Musk could have a lot to different remedies, both contractual ad civil, as could other shareholders. I could see Twitter stock tanking.BearGoggles said:Thank you.DiabloWags said:Filed April 25, 2022BearGoggles said:
Has anyone seen the allegedly "binding" agreement? Has it been filed with the SEC?
DEFA14A (sec.gov)
To 30 seconds to scan the agreement and searched for "Company Material Adverse Effect". It is all over the place, including 4.6, 4.9(b), 4.16(b) (SEC misrepresentations could impact third part contracts, such as advertising).
I am not a corporate attorney, but my understanding is there has been extensive litigation and case law related to MAEs. I have no idea if what Musk is alleging falls in that category but my wild ass guess is that the discovery of misleading SEC filings is potentially an MAE.
With a caveat that I haven't read the agreement, typically the bring down on the reps would be MAE for a public company deal meaning a breach of reps that isn't an MAE wouldn't cause the condition to fail to be satisfied.
I think there is basically no way Musk will be able to successfully argue that bots on Twitter are an MAE on the business. M&A practitioners have varying views on what could constitute an MAE but I don't think this is even close to the line. This is just Musk being Musk.
Where we differ is what the world considers a MAE. Musk's comments speak to the number of "real" users which in the world of company valuation is legitimate monetizable daily active usage or users ("mDAUs) The company said it estimated the average of false or spam accounts represented fewer than 5% of mDAUs during that period.
Twitter now admitted to overstating user numbers by 1.4 million to 1.9 million users over the past three years.
But it gets worse, in March of 2019, Twitter launched a feature that allowed people to link multiple separate accounts together in order to conveniently switch between accounts. Twitter now announced: "An error was made at that time, such that actions taken via the primary account resulted in all linked accounts being counted as mDA." So they have a bunch a duplicate accounts for the same real live people that they are counting as septette mDAUs. But it doesn't stop there. Since Musk started involvement in April the number of flower accounts started dropping off. Twitter called the drop off "organic" and not related to politics and that often times there are less followers when you take action against spammers. Really? Barack Obama, the most followed user on Twitter, whose number had increased every day in April, lost more than 300,000 followers after the announcement that Musk offer was accepted. Katy Perry, the third-most-followed user on Twitter, lost more than 200,000 after the announcement.
A material adverse effect is something that signals a material decline in profitability or the possibility that the company's operations or financial position may be seriously compromised. Let's start with profitability - there is none. If in fact, Twitter overstated its number of monetizing users, the ability to make profits in the future is at risk. There is a similar analysis you go through with operations and financial position, usually dealing with a material impact on asset or liability values or liquidity.
A piece of information is material if it is reasonable to expect that the disclosure of that information will impact the company's stock price. Companies and their accountants continue to find ways to come up with their own definitions of materiality. This involves establishing a numerical threshold (say, 5%) and deciding that anything that falls below the threshold will not be material.
The SEC attempted to prevent companies from hiding "material: items with arbitrary threshold by establishing the following rules:It's pretty clear that Twitter lied about the April disengagement of followers and it seems that was the intent. Twitter has now admitted it had understated false of spam accounts, which may or may not be material or intentional by itself, and then there was a duplication of users who had duplication of accounts under Twitter's own program, which looks quite bad. My guess is the stock tanks, the SEC will be over Twitter like white on rice. That Twitter chose to make public announcements suggests someone at Twitter senior management thought these events were MAEs within SEC standards.
- An intentional misstatement, even if it involves an immaterial amount, is material because of the intent to mislead.
- Numerical thresholds alone are unacceptable.
- Management must also weigh qualitative matters if the misstatement will hide a change in earnings or concerns a key business segment.
Besides, without having read the merger agreement, the M&A market, even now, is so seller friendly that most buyers rely on reps and warranties insurance instead of reps and warranties with a bring-down closing condition. Deal certainty has definitely shifted to seller's favor over the last few years. Most agreements are pretty much hell or high water closing conditions. I would be shocked if Musk has a lot of room to terminate an agreement. Sounds like a lot of white noise.
Of course deals have fallen apart, including for anti-trust hold up, especially if a regulator requested the buyer to sell a crown jewel. Or if the shareholders do not approve, subject to payment of a break-up fee by the seller. But MAE has never been used successfully prior or after the Akorn case.
Also, with PE having shifted the risk allocation on deal certainty risk to the buyer in the last 4 or five years, merger agreements in general but most definitely in a situation like a semi hostile like this will have deal certainty in favor of the seller.
...each of the representations and warranties of the Company contained in this Agreement (except for the representations and warranties contained in Section 4.2(a) and Section 4.2(b)), without giving effect to any materiality or "Company Material Adverse Effect" qualifications therein, shall be true and correct as of the Closing Date (except to the extent such representations and warranties are expressly made as of a specific date, in which case such representations and warranties shall be so true and correct as of such specific date only), except for such failures to be true and correct as would not have a Company Material Adverse Effect; and (ii) each of the representations and warranties contained in Section 4.2(a) and Section 4.2(b) shall be shall be true and correct in all material respects as of the Closing Date (except to the extent such representations and warranties are expressly made as of a specific date, in which case such representations and warranties shall be so true and correct in all material respects as of such specific date only);
Here are what I think are the applicable reps and warranties:
4.5 (b) Neither the Company nor any of its Subsidiaries is in default or violation of any Law applicable to the Company, any of its Subsidiaries or by which any of their respective properties or assets are bound, except for any such defaults or violations that would not have a Company Material Adverse Effect. Notwithstanding the foregoing, no representation or warranty in Section 4.5(a) or this Section 4.5(b) is made with respect to Company SEC Documents or financial statements, "disclosure controls and procedures" or "internal control over financial reporting," employee benefits matters, Intellectual Property Rights matters, Tax matters, which are addressed exclusively in Section 4.6 (Company SEC Documents; Financial Statements),Section 4.8 (Disclosure Controls and Procedures), Section 4.12 (Employee Benefit Plans), Section 4.14 (Intellectual Property Rights), Section 4.15 (Taxes), respectively.
Section 4.6 Company SEC Documents; Financial Statements.
(a) Since January 1, 2022, the Company has filed or furnished with the SEC all material forms, documents and reports required to be filed or furnished prior to the date of this Agreement by it with the SEC (such forms, documents and reports filed with the SEC, including any amendments or supplements thereto and any exhibits or other documents attached to or incorporated by reference therein, the "Company SEC Documents"). As of their respective dates, or, if amended or supplemented, as of the date of the last such amendment or supplement, the Company SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act, as the case may be, and the applicable rules and regulations promulgated thereunder, and none of the Company SEC Documents at the time it was filed (or, if amended or supplemented, as of the date of the last amendment or supplement) contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, or are to be made, not misleading.
(b) The consolidated financial statements (including all related notes) of the Company included in the Company SEC Documents fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as at the respective dates thereof and its consolidated statements of operations and consolidated statements of cash flows for the respective periods then ended (subject, in the case of unaudited interim statements, to normal year-end audit adjustments, none of which would have a Company Material Adverse Effect, to the absence of notes and to any other adjustments described therein, including in any notes thereto) in conformity with GAAP (except, in the case of unaudited statements, as permitted by Form 10-Q, Form 8-K or any successor form or other rules under the Exchange Act).
Thoughts?
