Lionel Hutz explains why Elon will own Twitter $TWTR (Podcast #131)

Lionel Hutz, author of the excellent lionelhutz substack, comes on the podcast to talk about the ongoing drama with Twitter and Elon Musk. In this episode, we exclusively discuss the Twitter case as it stands on October 13th, the odds the deal closes at the end of the month, why it might not, and what happens if it doesn’t. If you’re looking for more background on the deal, please see my podcast from May with Evan Tindell or August with Professor Ann Lipton and Compound248.

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Disclaimer: Nothing on this podcast or on this blog is investing or financial advice; please see our full disclaimer here. The transcript below is from a third party transcription service; it’s entirely possible there are some errors in the transcript!

Transcript begins below

Andrew Walker: Hello, and Welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot If you could follow, rate, subscribe, and review it wherever you're watching or listening to it.

With me today. I'm happy to have Lionel Hutz. Lionel's a recovering lawyer, who operates, obviously under the pseudonym Lionel Hutz. You're not getting the Simpsons character, Lionel Hutz, unfortunately. But Lionel also writes the excellent Lionel Hutz Substack. Lionel, how's it going?

Lionel Hutz: It's going great. Thank you so much for having me on today.

Andrew: Hey, thanks so much for coming on. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing advice. We're also going to be talking about a legal case today. Only one of us is a lawyer, but even with one of us being a lawyer, I'll just remind everyone. This isn't legal advice either, so, not legal advice, not investing advice. The second one, I start every podcast with a pitch for you, my guest, you know. I've been pimping it out on my blog non-stop, but you write the Lionel Hutz Substack. I think it's been excellent. Obviously, I found you because of your coverage of the Twitter case that you've done great work on. You've written up the Burford case which I think is super interesting. I've done a podcast there. You did a great write-up of that. You've been covering Gogo a lot. You know, I just think anybody who's looking for quirky legal situations, should go ahead and give it a follow, check it out. All are included in the show notes.

All that is out of the way. Today we're going to be talking about my obsession, Twitter. We're recording this on October 13th, that's Thursday. I'm hoping we'd get this out on October 14th, that's Friday. You know, things have changed a lot. We're only going to be talking about the case as it stands today, right? So if you want to go talk about Bots or you want to go talk about the trial before, everything that happened last week. I did two podcasts on this previously. You can go listen to those podcasts. As it stands today, last week, around October 7th or so, Elon Musk threw in the towel, right? He said I'm not going to pursue this case anymore. I'm ready to close on Twitter. Judge, if you stay this case, basically press pause on this case, I will close this deal by October 28th.

This being Twitter, you know, nobody-, people think it's likely he closes it. But people also think there's a pretty good chance he doesn't close. And you can see that in the stock market. As we talk, the Twitter stock is at about $50, deal prices are $54.20. If it closes on October 28th, that's an 8% gross spread. The IRR on that is so high, it's absolutely laughable. So today, I think what you and I want to talk about is, "Hey what are the odds that Elon Musk closes this on October 28th." And in the unlikely, but still, a very possible chance that he doesn't close on October 28, Why didn't he close? What's his argument going to be going forward? Where will this case be going forward? So I have spoken a ton. I'm going to pause there and ask you, Lionel, what are the odds Elon Closes the deal on October 28th? And if he doesn't close the deal on October 28th, what's his argument that he's going to use for not closing?

Lionel: First of all, thank you so much for that intro and for your legal coverage as well. It's been very in-depth for a non-lawyer. So I'm incredibly impressed and looking forward to your future legal career.

Andrew: I appreciate that. I've been thinking about going back to law- going to law school just based on this case and it's been so much fun and so stressful.

Lionel: I don't know if you need to. I think you might qualify for the apprenticeship route at this point. I think you need at least an honorary degree.

Andrew: I appreciate that.

Lionel: But to your question, what are the chances that Musk closes? What are the chances that he closes by October 28th? Look, my position, both from a legal analysis perspective and from my own personal account is that Musk is going to ultimately own Twitter, one way, or another. One version of History versus-, There's no chance in my mind that Musk does not end up owning Twitter at some point in the future. I think the likelihood that he closes by October 28th is fairly high. Musk is fairly constrained at this point in the routes that he can go. If he chooses to try to contest this further. The routes that he can potentially go, are really foretold in my mind. He could say that there is some issue with the debt financing. He could say that there's an issue with the solvency of the new entity at closing. He could try to go back and litigate his old claims saying, "You know, this is still a bot issue. There are still issues around Zatkos' termination payments, etc. Or he could try to somehow invoke CFIUS.

And I can't stress enough, how meteorically stupid that would be for him to try to go that route, but it's nonetheless a possibility. Because you know, as you mentioned, look, the spread is still a large one. And, you know, I think all the legal analysis says that it should not be as large of a spread as it is, but that the personality of musk simply cannot be ignored, which is the primary driver of that spread. There's really not any legal reason behind it. Musk himself is the reason for that additional, let's call it a 7 to 8% spread over where it should be.

Andrew: That's fantastic. I really want to talk to you about the two most interesting aspects of the case, and I agree with you. There are four routes he could take. The two craziest and least likely, I would say are CFIUS, and just saying on October 28th, "Hey, Judge. Actually, I want to go fight the NVA use again," And if I could just quickly sum it up because I really want to talk to you about finances, obviously. CFIUS, look, Elon Musk is a US citizen. CFIUS is their committee for foreign investments into US companies. That is, if a Chinese company is buying a semiconductor, right? Elon is a US citizen. He has security clearance from owning Starlink. For CFIUS to come and say that Elon is a foreign agent. And everybody was tweeting about this because he allegedly had a phone call with Vladimir Putin. I just think it would be crazy for CFIUS to all of a sudden, in the next two or three weeks say, " Elon's, a foreign agent."

And then the other thing is October 28th. He comes and says, "Actually, your honor, I would like to have a trial about Bots." After this day, everyone I've talked to-, The trial was already going badly for him, but judicial estoppel, all this sort of stuff says, "Hey, you just got ready to close." And said Twitter had-, one of his motions to say, said Twitter had met all of their conditions, which basically waves the Reps and warranties breach. Yes, I mean anyone can do anything or try to do anything, right? But everyone, I've talked to has said, "No, That's just a flat. You have lost. I am sorry, sir." So, I'll let you comment on either of those two if you'd like to but I just wanted to put them away so we can focus on the juicy stuff.

Lionel: No, I think that's a fair summary, I think. Yeah, CFIUS, he simply has too much to lose and on the bot issue or re-litigating issue. McCormick will not find that to be very funny.

Andrew: I will find it to be very funny.

Lionel: Yeah. It will certainly supply more material for additional articles. And you know the many people-, I would be remiss to not mention the many people that have been covering this who have done a fantastic job. You know, everyone else will surely have a laugh and, you know, publish more articles that we'll all have a great time reading. But no, McCormick will not find that to be very funny.

Andrew: It will also be a lot more fun because if we're going back to arguing Bots again in November, I'll just be laughing. And like I think the market will be very happy. Whereas if we're arguing seeing financing and solvency, I think they are long shots. But there is a little bit of teeth to it if that makes sense. So, let's turn to financial insolvency. Both of these do interconnect with each other, but if you read Musk's motion to stay the trial, It's three paragraphs of, "Hey, I'm ready to close. I plan on closing on October 28." And then it's 20 paragraphs of, "But if the debts are not there, I can walk for a billion dollars." So, a lot of people have looked at that and said he's clearly laying the groundwork to try and walk on financing or solvency. So I want to ask you to describe what financing insolvency routes are. And then we can start talking about, you know, how he would invoke them, and why he'd invoke them, the reasons why or why not Twitter would win on that, all that type of stuff.

Lionel: Right. So, on the financing front, Musk is setting this up to create a condition that needs to be met specifically. That, the debt needs to be funded prior to closing this transaction. Now, it's really important to note that, that was specifically carved out of the original merger agreement, and Musk has tried to inject this into this latest filing. So this is something that is actually new to the case that he is trying to bring in now. And again, we can get into, you know, exactly why that likely won't end up working out for him. The solvency issue is that Musk has essentially wrapped that the new entity on close will be solvent.

And he could show up and simply say, "Well, you know, given the amount of debt that this company will hold. And, you know, the fact that all of these, you know, stock, the shareholder agreements, and stock compensation plans will basically be a cash expense you know, on closing. There's no way that I can, in good faith represent that this will be solvents upon closing. And therefore, I'm simply not going to sign the solvency certificate." Again, we can go into exactly why that's probably not going to work out for him but those are the two routes that he at least thinks he probably has at this point or that are worth taking a swing.

Andrew: So just to clarify, Elon Musk is part of this deal. He's buying Twitter for about 44 billion dollars. He got 12 and a half billion dollars of that 44 billion dollar price coming from debt financing, right? Morgan Stanley is the lead on that debt financing stuff if I remember correctly. And he is saying, I have two routes. Number one, if Morgan Stanley says hey it's a bad stock market out there. Tech stocks are down 80%, and interest rates have gone up by 4% since we agreed to this financing in April. We're going to lose a bunch of money on this. We are not going to fund this loan. That's the financing out, right? That's number one.

And then number two would be, you know, like any bank before someone borrows you need to sign and say, "Hey this money, it goes to support something, it's not going to cocaine. It's not going to all the stuff there." like the entity that is borrowing it. I think is solvent. As I know the thing right now, I think they will be able to repay this loan." Musk could choose, he has to sign the solvency opinion or a CFO. They have to sign and say, "hey as we're borrowing this, twelve and a half billion dollars right now. I think the bank will get paid back." If he doesn't sign that that's the insolvency route. He didn't sign that. And the bank says, "Well, we can't give you the loan." and then he's kind of destroyed his own financing. Am I thinking about these two risks correctly?

Lionel: Yeah. Absolutely. And I think it's worth noting that you know, Morgan Stanley and the other debt financiers will absolutely take a bath on this deal. They stand to lose, I think it's somewhere between 500 million and a billion dollars if this closes. So they certainly would love for this deal to disappear. Now there are a lot of reasons why they won't simply walk but it would be a godsend to them if the deal were to disappear. Similarly, on the solvency side, there are- people have raised legitimate concerns about the ongoing solvency of the Twitter business. Now, it's important to differentiate, you know, projections of what Twitter might look like in two years from the solvency upon closing, which is really what we're talking about here in this merger agreement.

Andrew: That's great. Now, I think if a layperson looked at this deal and they said, "Hey, Andrew and Lionel are talking a lot about financing." like this deal when it came out and said, you know, the practice it is not contingent on financing and we'll talk about what the merger specifically says about financing. But the debt has been committed and it's not contingent on financing. So, how is he going to get out on financing? You mentioned the banks' taking a bath, but I think Pros who have done this for a long time would say, "That's not a reason to get out." So, I just want to talk about like, how- what would the process be for the banks actually, pulling out on this look like?

Lionel: Well, first, I should say that I am not a leveraged finance expert. So, you know, the internal machinations of Morgan Stanley are a little above, my pay grade. There are a lot of reasons why they won't even attempt to get out of this. And I think we should just kind of address that first off, there were huge reputational issues to Morgan Stanley and others if they were to simply walk. They have essentially the entire business of, you know, their left-in arm at stake. So even though they stand to take a bath on this, it is highly unlikely that the long-term terminal value of this business is worth, you know, the risk that they will assume by simply walking on this. There are a few different ways that it could actually happen and it's important again to kind of bifurcate this into two paths.

One path is simply that the banks themselves refuse to fund this, that they show up and they say we are not going to provide the financing. The other path is that musk himself is working to shoot himself in the foot here and do things in the background that cause the banks to not fund. That would be more analogous to what we saw in the DecoPac case, which I've written about, which Matt Levine has written about, which has been discussed at length. And so there are really two ways that the banks could ultimately decide to not fund this and there are different consequences for each one of those.

Andrew: Yep. I think your point on the left arm thing is great it's a point I've been making to a lot of people. Look, Yes. The banks are going to take a 1 billion dollar bath on this or 500 million or whatever you want to call it. But there was a Jamie Dimon interview a couple of days ago, which I think summed it up really nicely where he said, they're big boys, right? They've built this in that they will lose money on loans and if they pulled out Twitter is the greatest MAE, most public, most visible MAE buyer's remorse case we'll ever see. If they pull out just because they were going to take a little bit of a loss on these. They've absolutely destroyed their left in finding franchises, right? And that advice, hundreds of murders per year, generating billions of dollars in fees. Every seller in the future is going to say, "Oh Lionel, Andrew, you're the buyers. You're coming to me with finding some for Morgan Stanley." Guess what? Financing is a commodity Morgan Stanley's no good. We remember when they pulled from Twitter because things got a little hairy, go find it from someone else. So they've destroyed their franchises. And they have a contract, they're going to lose in court on the contract as well. So they've destroyed their franchises and they probably have to fund alone anyway, not a good combo for them.

Lionel: Yeah, it's also worth noting that this is not the first time that Morgan Stanley and these other left-fin guys have taken this type of a bath. This stuff, you know, I hate to say, it happens all the time but it happens relatively frequently. So so this is not an unheard-of scenario. As you say, they're big boys, they've built this into their projections and economic downturns are part of those projections. So to think that they're simply going to walk in this scenario would be a bit farcical a bit, you know a bit of a leap.

Andrew: It comes back to buyer's remorse, right? Like if the markets had gotten really hot, Twitter would have had to do this deal and they would have made-, the debt financers actually would have made a good bit of money on, "Hey, we had this loan built-in at 10% and we're selling it to investors at 7%." And if I remember from my left-fin days like you have to split part of that profit with the borrower, but you would have made money on the upside just because the downside came into play. You can't have buyer's remorse. And the only other thing I'll note there, you can correct me if I'm wrong, but you know, left-in is not a new thing. It's been going on for, at least 40 years. To my knowledge, there has not been a single case in Delaware/New York that has broken solely on financing. The two exceptions that would be, Hexion, Huntsman had a little bit of financing there. But financing was not courted to that case at all.

And then in the financial crisis, there was Footlocker, Geneseo which was under Tennessee Law, where the financing fell through. And I believe the financier paid a massive, massive fee in the end, in the lawsuits, get out of it. So there are only two cases if you really want to stretch, outside of that, none. And I would just say if you base rate and said, hey, in 40 Years of left-in, nothing has broken on financing. That tells you how solid these financing agreements are. I rambled a little bit. I'll pause a bit.

Lionel: That's perfectly Fair. Yeah, the Hexagon case is not really analogous to what we've got here. Hexion, I'm forgetting the exact details, but you basically had the financiers blowing up. I mean, this is, this was existential to their business, the money simply was not there. Versus what we have here, which is Morgan Stanley is simply not going to want to finance it but they are perfectly capable of financing it. Now...

Andrew: As one expert told me that was like, "Hey if Twitter's lender was Bear Stearns in 2008..." That's when the 1 billion dollar termination on financing would come in where it's like, "Hey, our lender actually blew up and Market conditions are so bad. We can't find alternative financing," but it's not, "Hey, the lender is going to take a little boo-boo on this."

Lionel: Yeah, that's exactly the right way to think about this. The other thing that I'll note quickly, that people may not be familiar with, you know, you mentioned New York Law. So those agreements with the banks as you mentioned, are written under New York law, the applicable in those agreements is New York law. So for anyone listening, who is wondering why we're talking about New York law when this is a Chancery case. Yeah, that's the reason why we're discussing New York.

Andrew: Let's go back. There are two ways financing could blow up here, right? Outside of the bear Stearns case we just said. Number one is October 28th comes and the bank's come and say, "Elon, you have done such a good job every hour, every hour on the hour for the past three weeks you have called up for spreads of lenders and you have said this is going to be the greatest deal of all time. I need you guys to come with me. You're going to get paid back so quickly. It's going to be the best risk-return you've ever made, but the markets are so bad and we're going to lose so much money and Twitter's so bad. We just can't lend this money to you. So we're going to have to break back out of the finance, right?" That's number one.

Number two is Elon could not meet with any lenders. Every time somebody tries to talk to him, he could say, "Hey, I think Twitter sucks. I'm not excited about the deal anymore. But it's too much of a headache and I have to turn around Tesla. I'm trying to achieve peace in Russia, and Ukraine, launch rockets into outer space and go to Mars and I just don't have the time to do this trial anymore, right?" That's number two. In case, number two, DecoPak, which you alluded to, there's a precedent trial, where a buyer tried to nuke their own financing. Anyway, I'm actually getting ahead of myself. I'll let you talk about, you know, in case number two, nuking your own financing. Why you can't do that, then I want to come back to case number one, but let's talk DecoPak and nuking your own financing and all that.

Lionel: Yeah. Well, we have this Doctrine called the prevention Doctrine, which essentially says that you cannot be the architect of your own insufficiencies. And DecoPak was a great example of this. The Private Equity Firm that was trying to buy this cake decorating company essentially bought this or agreed to buy it right before Covid. Covid hits, of course, and the business is no longer worth what it was and Kohlberg goes to the financiers with these really dismal projections and says, "Oh wow, The business is just, we can't support this debt. The business is going to be terrible. Now, you guys really, you know we need to renegotiate this thing." And of course, the financiers are going, "Wow, these projections look terrible. We want to get out of this." And so this is exactly what the Prevention Doctrine is designed to prevent. Musk is not going to be allowed to engineer this for himself.

The court has two remedies that they can look to in order to solve this. Their first remedy would be, Musk would have to sue the banks to go get that money. What would likely happen in this scenario is the Twitter transaction would probably close first. And musk would then be on the hook for this 13 billion. And he would have to go sue in New York Court and that would take God knows, how long, but he would eventually have to come up with this money himself and he would have to litigate to recover those costs.

The second way that the court can deal with this is to simply force Musk to cover the entire purchase price. They can force him to pony up everything and forget about suing the banks. As for which one is more likely in that scenario, I can't speak to that. I think the, you know, the court would probably tell him just go sue the banks and we'll proceed. But those are the two remedies that the court can look to.

Andrew: Many of the experts-, And I this is elegant, many of the experts. I talked to had said, "Look, it makes the most sense if you think musk has unclean hands. He nuked his own financing DecoPac, all that. It makes the most sense to just say, "Elon, sorry. You broke the merger agreement. If you break the merger agreement you can't get out on." There are lots of reasons you can't get out... prevention doctrine, and all this. You have to close forty-four billion dollars. You can cover it, or you can declare personal bankruptcy and Twitter will become an unsecured creditor in your case. But you have to close. You have the assets close. And then you can go sue the banks on your own time for financing, right? If you're saying they broke and a lot of people said that's a really elegant solution. Because right now if the court ordered Elon to go sue the banks, he's almost in this weird scenario where he wants to take his own suit, right? So that he can continue to argue financing whereas if they just say close and then sue the banks, renegotiate with the banks, anything on your own side. That's actually a really equitable and sophisticated remedy that aligns all the incentives with everyone.

Lionel: Yeah, I think that's exactly right.

Andrew: So we talked about-, that was case number two, right? Over the next three weeks, Elon just sabotages his own financing. There's case number one where Elon tries like crazy, but the banks don't find it for X, Y, and Z reasons. And again, we've talked about why the banks are locked into a contract. They're big boys and everything but anything can happen, right? A lot of people have questioned-, People are saying if Elon performs perfectly like an absolute Angel, like my Baby Penny, who's the best dog in the entire world. He's a good girl for the rest of the way, right? Could he-, and the banks can't fund. Would he be able to get off on financing out, or would a court likely look at his actions over the past five months and say, "Hey Elon, you already have unclean hands, two or three weeks of trying to get financing doesn't clean your hands. After you spent the whole summer saying Twitter is a fraud. The Bots are a fraud. This platform's a disaster SEC. Why aren't you investigating Twitter? Like, your hands are already unclean. And guess what, trying for two weeks doesn't clean your hands"? What would you say about that argument?

Lionel: I think you're exactly right. That this would not absolve him of the sins that he has committed throughout the trial. I think also look, if we just look to the contract and sort of ignoring Musk as a personality for a moment, you know, the financing is not a condition to closing under the merger agreement. It's in, I believe Section 5.4 and I'm forgetting, there's another section, I think...

Andrew: It is Section 5.4. I know it because I've got to highlight it. It's the second-to-last sentence in 5.4. I can tell you.

Lionel: Yeah, yeah, I should have it just tattooed into my arm at this point but I haven't gotten around to that. That would be. That'd be my first tattoo, but I think it would be a good one. It would be worthwhile. Now, I think look, the court is not going to absolve those sins for one or two weeks of, you know, altruistic actions by Musk. You know, it's important to note, we still have those same remedies available, right? The court can still order musk to sue the banks, to perform on these contracts. The court can order Musk to come up with the money himself. And that doesn't even require us to get into a deep discussion of Musk's unclean hands. So, you know, again, as far as the likelihood of outcomes, I think the deal closes and we end up worrying about the financing at a later point, or rather Musk worries about financing at a later point.

Andrew: Let's briefly talk about insolvency. So we've already laid out the insolvency, right? The October 28th comes and Musk says, "Hey, I can't- Musk's CFO says, I think Twitter is worth less than the debt. I can't sign the insolvency opinion. Good faith. We're seeking financing out because insolvency nukes the financing and stuff." I mean, I think the doctrine of unclean hands would come into play but I do want to talk about it. Like I know people, there was an informative article the other day which if you read it, it's an equity investor into Elon's group that says, hey, I think Twitter is worth 10 billion dollars right now and you agreed to an equity co-invest in Twitter at 44 billion dollars four months ago, not good for you. I wouldn't have wanted to attach my name to that and try to go explain it to LPs. But you know, maybe some people do think Twitter's worth less than that at this point. Can Elon, get out of insolvency? I don't believe anyone's ever gotten out of insolvency. But what do you think?

Lionel: No, I'm not aware of someone-, of a buyer getting out of a deal by showing up and failing to sign a solvency certificate. There are a few points that we have to address. One is Section 5.9 says that the parties will make this new entity solvent upon closing. It's important to note that Musk is not actually a party to section 5 .9, but, the parties which would include the X entities, you know, have repped that this will be a solvent entity upon close. As you mentioned, I'm not aware of a scenario where a buyer has been able to get out of closing a deal, simply because they refused to sign that solvency certificate.

Andrew: Can I dive into that? Because that's one area I haven't explored. So 5.9 says the parties will. And that's basically saying-, X holdings saying look, Twitter will be solving a closing. But, you know, there's this thing called piercing the veil where X holdings is-, the only thing it's got is cash coming in from Elon, basically, right? So could you read the 5.9 rep and just skip ahead to the end? Basically, say look, if Elon thinks Twitter is insolvent based on 5.9, either the court or Elon himself should just agree or the court, could Pierce the Veil and say, "Elon, this is simple. Pumping two billion dollars more cash into Twitter to make them solvent and get this deal done." Am I thinking about that correctly?

Lionel: Yeah I think that's a very likely outcome. I think it is a good candidate for "piercing the veil" if we end up going down that route because you know, there is sort of a common corporate identity between Musk and the X entities. I will say, you know as far as financing, you know, you mentioned the one Equity partner, which was trying to get out, I believe that was Manhattan Venture Partners the other day. It's worth noting that, if musk has to come up with the money on the equity side, he does probably not have to come up with a tremendous amount more. I did read that article where Manhattan Venture Partners was saying that we think Twitter is worth 10 to 12 billion or something like that, but it's important to note that Manhattan Venture Partners is a firm with I think less than a billion assets under management. They are not a majority investor in this by any stretch. We look at the other partners in this deal, we've got Larry Ellison, who's going to pony up, we've got, you know, the big VCs that are still committed to this deal. So if we do end up requiring Elan to pony up more money, It is unlikely that the bulk of those Equity Partners Stakes is at risk.

Andrew: Yep. Just on insolvency-, so this is going to get technical. But you know what, people that are listening to our podcast. That's not legal advice, we're talking about a merger contract. So it has to get technical.

Elon's motion to stay or his proposed order to say, I'm sorry. From the top of my head, it basically says-, paragraph one it says, "Hey all conditions to close..." I don't think it was exactly this, but it's, "all conditions to close are met or all the conditions in article 7 are met." And if you read article 7, I believe it was, solvency is not an exception in that article if I'm saying this correctly. So my question is basically, Elon says article 7 is good. Solvency isn't mentioned as an exception, article 7 says, we're ready to close if there is a solvency condition above. Has Elon already repped that as of when he made that proposed motion to stay or whatever, did he rep that Twitter solvent there?

Lionel: It's possible. You know, there's a host of issues to discuss in terms of judicial estoppel and other things that essentially make that a binding statement. Look, it wouldn't necessarily be like a fraudulent statement if in the ensuing weeks, there was something to cause the new entity to become insolvent, but I think it's important to note that, you know, it's highly unlikely that there are new events coming to light that are not curable events. That would make it an insolvent entity. In other words, I don't think McCormick is going to think. It's very funny, again, things that McCormick won't think are funny. McCormick isn't going to think it's very funny for Musk to show up two weeks later or two and a half weeks later or whatever and say, "Oh, actually, now I think there's a solvency issue. I didn't think so before. I didn't bother bringing it up, but things have really changed even though effectively nothing has changed. Because you know, I'm quite sure that the major players are still showing up to this deal."

Andrew: Just to add on. This is the first time we mentioned her name. So McCormick is Chancellor McCormick-, I believe I can call her a judge, the chancellor who's overseeing the case. She was also the author of the DecoPac case that we've mentioned a few times, that's a great precedent here. And I know arms when she got assigned to the case where instantly like DecoPac, this is really good for us. So you mentioned, and I think that's great judicial estoppel says, "Hey you can't file, one day that says, Twitter is insolvent. I want to get out of it. And then the next day, say, Twitter is solvent. I want to do the deal and then the next day, say, Twitter's insolvent," you have to be consistent throughout your files, right? So both on insolvency and financing. There are two things if Elon tries to get out on October 28th, he could go for either out. He could either say, hey, when I made the motion to stay the week of October 4th, I was serious about saying, but something so bad happened between October 4th and October 28th that I can no longer sign that this is solvent or, you know, I don't think financing is available anymore or he can say, "Hey, I made the motion to stay and in the back of my mind, I knew I was going to say Twitter was insolvent, or I knew that financing was going to fall through, but I just had to file the motion to say to put off the trial so I can make this new claim", right?

Let's start with the kind of crazier one that I don't think the court will be very happy with and let's say he was kind of weaponizing the system. He filed the motion to stay with the idea that he was going to do this. I mean, at that point, can the Judge-, even if he's right and it's insolvent, if he weaponizes the court like this could she kind of throw the book at him?


Lionel: I think so, you know, again it's going to come down to what McCormick can actually, sort of prove with the evidence in front of her, right? You know Musk could come up with some plausible argument as to why things had, in fact, changed. So McCormick is not going to simply throw the book at him. He could...

Andrew: But that's if he says it went insolvent between October 4th and October 28th, right? If he said, "Oh, I knew in October 24th, I thought it was insolvent and I pause for three weeks because I wanted to make this argument." I think that's a different thing where you kind of weaponizes the system, right?

Lionel: Yes, sorry. That was my misunderstanding of the question. So if he did, in fact, hide this argument, hide the ball on this argument. Yeah, McCormick will absolutely bring hell down upon him for doing that. I think you know, even absent, the full discussion of judicial estoppel, it's simply something that he didn't raise and he had the opportunity to and should have raised it, had there been a substantial concern. So in order to move forward with Musk's articulation of events, you essentially have to believe that this was truly an innocuous and inadvertent slip-up and I just don't think that given the amount that's on the line, McCormick would find that to be a very plausible and satisfactory outcome here.

Andrew: Perfect. Last thing, and then I want to talk about how the trial would go. So again, we talked about how Elon Musk and his motion to stay, he said, "Hey I want to stay, there are three paragraphs that I'm ready to close. I'm going to close by October 28th. If you give me the opportunity and then there are 20 paragraphs of, but if the debts are not there, I can get all out for a billion dollars." And one thing that struck me is, obviously, everyone was struck by how many times he's basically hinting to the court that he's going to do this, right? Even though I think both you and I think it's not a good idea to file this motion to stay and then try to get out of it unless the facts and circumstances have actually changed.

But the other thing that jumped out to me and a lot of arbs is he included in a footnote, he said, "If defendants refuse to close because the debt has not been funded, Twitter can only pursue a claim for breach against X holdings." Okay, that's fine X Holdings, the merger sub. The remedy for such a breach is a 1 billion-dollar termination fee. And the thing that jumped out to me is they included a section that said, "The merger agreement, expressly caps, the amount to that termination fee." And this is a quote, even in the case of a knowing and intentional breach. Consistent, with that cap, Musk has a 1 billion dollar limit of guarantee to the X holdings, right? So the question here is look, we've been talking about how, if there's financing out, if there's an insolvency route, it seems like Elon's got unclean hands. It seems like a judge would ignore that. I think the incentives would say just make Elon close and go sue the banks for that close or whatever. All that.

But Elon is saying here, "Hey, even if the financing was caused by a knowing and intentional breach I absolutely nuked my financing, the merger agreement says, I can get off for a billion dollars. Peace, see you. I'm out of here. Here's your billion-dollar check." Why is that right, or why is that wrong?

Lionel: My God. Am I never going to get out of talking about this one billion-dollar termination fee? I feel like this has just been the most-, It's been the bane of everyone's existence in talking about this thing. But it's a very valid point.

Andrew: It has. But look this, I mean, I've always dismissed it. You can't just get out. But when he said in a footnote, he called out the billion-dollar termination fee and said, "Hey, I can get out on this, even if I knew to my own financing," I was like, "Oh, well, there's some fun little interesting new argument to hear.

Lionel: Yeah, yeah. It's an interesting argument, it's an incorrect argument. I think the termination fee in the merger agreement, I think it's Section 8.3... And I want to say, it's 8.3, what... B2 or something like that.

Andrew: I think that's right. I know it's 8.3 and you can tell, we've been reading this merger agreement too much, when you can just start quoting sections and subsections.

Lionel: Yeah, I feel like I need to pull up my notes and actually validate this. And I probably should just because this argument has come up so much, the short answer to your question is, nothing in the merger agreement says that that is an exclusive remedy for Twitter and that it is a remedy that the company, which is Twitter in the merger agreement, can essentially elect to invoke. This is not something that Musk by himself can essentially flip on and then walk away. So there are multiple reasons why the 1 billion dollar termination fee is not something that is available to Musk. Certainly not available to Musk at his discretion. And adding that additional language in there in that footnote, saying that that is the sole remedy even for an intentional knowing breach is simply, you know, Musk trying to rewrite the contract which-, good luck. McCormick has shown that she is a very keen mind. A very astute observer of all of this. Nothing has gotten past McCormick, that is a swing for the fences If I ever saw one.

Andrew: And just to clarify because I do think-, I heard from some people when this came out, one of the things that they start saying was, well Elon is a party to the contract, but X is the acquirer. And X has no assets. And Elon, you know, in the event of a breach, it's very clear that he has limited liabilities, X for a billion dollars. And people started saying, "Did Twitter misgraft this contract, where this little technicality legal loophole will let Elon just write a billion dollars to X and then say hey that's all you guys could come out from me.

Lionel: Yeah, so... You know, there are a few issues present here, which is Musk. actually, is a party to certain sections of the merger agreement. He is a party to Section 6.10, which is a financing section where says, the parties including the equity investor, which is musk, will do everything they need to do to make the financing happen. He is a party to section 6.3, which says that he will take reasonable best efforts to close. So this is not something that Musk can essentially shift onto the X entities and say, "I have no obligation." We also have the issue of piercing the corporate veil, which for some reason, you know, we get into the realm of damages and the assets of the X entities are insufficient we would likely see a piercing, looking through of the entity and saying, okay, who is really behind this entity and forcing musk to come up with that himself?

Andrew: Perfect. All right, I think we've talked about-, Again. there are four ways Elon can try to get out. CEPHEUS which, my gosh, my God.

Lionel: Yeah. Let's not go there.

Andrew: We can try and go argue Bots and all that again, which, "Hey, I've got two podcasts on where people could go listen to those if they want and be-, It's not going to be a great look for you. If you say, "Hey judge, pause the trial. I'm getting ready to close. I was getting my butt kicked." Actually, I want to go back there. Not going to be great. But, we've covered financing. We've covered insolvency. Let's talk about what happens. We've talked about the arguments that will get made, but let's just talk about the process that's going to happen, right?

So, October 28th comes and Musk argues, "Financing or insolvency, I can't close this contract." McCormick said, somewhat humorously, "If you guys don't close, October, 28th, shoot me an email and we'll figure out where we're going?" Like she wouldn't have heard of it from other places. But what's the process going? Because, you know, the trial was supposed to happen on October 17. So we missed the trial date, we're going to have to go, do-, Musk still needs to get deposed. We're going to have to fight on to new arguments for financing or insolvency. There are probably going to be new depositions with lawyers, bankers experts on valuation, and all that sort of stuff. So, what do you think the process would look like, if, you know, we come to the end of the month and we haven't had-, Elon hasn't taken full control of Twitter?

Lionel: Yeah, I think you kind of hit the nail on the head and you touch on most of it there. There are outstanding discovery matters that need attention. So that is, you know, the Musk deposition, that is various discovery Motions. As you mentioned, we could potentially see new issues related to the financing and depositions around that. We would have pretrial motions and likely, a series of stipulations narrowing this case. Similar to the last hearing where the parties had met and confirmed prior to the hearing and a lot of those issues ended up being resolved prior to the hearing. I suspect you would see some of that as well. So, the trial itself would be narrowed in some capacity compared to, you know, what we thought the trial might look like three months ago.

McCormick, look, she's gonna try to push this along as rapidly as possible. I think it's highly likely that given a potential series of new arguments and issues, that we would need say, three to four weeks before a trial was to actually begin, but we would still see a five-day trial. I don't think anything is changing on that front, And ultimately, the process following the trial, I think, remains the same and we can get into the sort of what we think the timeline there looks like as far as how long do we actually have to wait until we see the resolution of this.

Andrew: No, that's great. So I have heard-, I've come to, as a non-lawyer, I've come to agree with the timeline you laid out where I think it would probably be the end of November or early December when we get the trial, and it's a five-day trial. But I have heard people who said look McCormick has clearly said, Twitter is getting harmed by this. There is a huge need for speed. Could you see... October 28th doesn't happen and McCormick says, "Great. Elon, you're sitting for a deposition on October 31st, we pause this trial week of October 4th it was supposed to be a trial on October 17th, and trials back on the week of October 28th. Guess what? We're having a trial on the week of November 7th. And it doesn't need to be a five-day trial because Elon, you just gave away all your claims to reps and warranties, bots, and everything. We're having a trial on financing or insolvency one or the other. It's going to be a two-day trial. We're done." I've heard some people suggest that. I think it's unlikely. But I can see all the arguments, right? It's an edge case.

Let me ask if we try financing out. I'm guessing the new trial is going to focus a lot on Discovery, a lot of Twitter, looking at Elon's messages with the banks, interviewing bankers, saying, "Hey, why couldn't you finance it?" Elon's arguments over the summer, did that really impact the financing? Did Elon tank this financing himself? If this had been done in July or September when it should have been done? With the financing having been available there? I'll ask, was all that correct? And then I do want to ask if the financing would have been there in July, but it wasn't there, when we tried to close in October, is that a good argument for Twitter?

Lionel: Yeah, a few things to unpack there so you may have to ask again, you know...

Andrew: Yeah. I only threw seven questions at you.

Lionel: Yeah, I think you know, to your earlier point of, is there a chance that there is an expedited trial that this thing you know, November 1st like we're incurred? Is there a chance? Yes. Absolutely, there's a chance. I think in order for that to happen we have to not have the series of new issues relating to financing. We don't have to pose anyone else. We have a Musk deposition and then we essentially go right into the trial following some pretrial briefing. Is it possible? Sure. But I think at this point, Musk is being advised that these financing options are his only chance, which would mean that we would see some necessity for additional delay. So I don't think it's likely that the trial would begin a week following October 28th, but it is entirely possible. And I'm sorry, I've already forgotten. You're gonna have to remind me what the following question was.

Andrew: That was great. Let's say this breaks on financing. The two things I wanted to ask, I'm guessing all of the discovery. All the arguments are going to focus on Elon's messages to and from the banks. And then Twitter's also going to be really focused on the banks: A, did Elon nuke his own financing? And B, could the financing have been there if Elon had closed on time, on terms in July, or September versus pushing the date out, two months to October? So I want to ask, A: Am I right on the first? And then on the latter, if a banker comes out and says we would have closed in July but because the market got so much worse by October, we will now close. Is that a good argument for Twitter?

Lionel: It isn't a bad argument for Twitter. I think we sort of end up in the same spot, though. This but-for-hypothetical, you know, I think it doesn't really matter why the banks aren't closing today. And whether or not that would have been different two months ago, three months ago, etcetera. I think we'd still end up in the same situation of Musk being ordered to close, and being told, to go sue the banks, or you know, come up with the money yourself. I think it's an argument Twitter might briefly raise, but again, I think what we're focused on here is simply the outcome that the banks are under an obligation. Musk is under an obligation to use his best efforts to close. And I don't think we really need to get into this hypothetical of what would have happened a couple of months ago, because the contract is fairly clear on Musk's obligations to move toward closing.

Andrew: If we go-, if we are not arguing financing but we're arguing insolvency, I think the arguments become, Elon and Twitter, both higher valuation experts. Twitter's valuation expert says, "Twitter is easily solvent." And Elon's valuation expert says, "Twitter's definitely not solvent," right? So we'll have some valuation experts and then I think Twitter is going to focus again a lot on Elon's emails, buyer's remorse, and his State of Mind. How did you come to this, saying, "Hey, Nobody's ever gotten out on that"? Is there anything else I'm missing? I'm just talking about in terms of the practical, what we're going to be seeing in both companies we're looking at.

Lionel: Yeah, I think that generally sounds right. You know, again I think you're spot on with the solvency issues and Twitter's arguments, you know, if they will be pointing to Section 5.9 of the agreement saying, "Hey, you guys said that this thing was going to be solvent and that you make it solvent." So ultimately, you know, while musk might bring some economics Ph.D. to say, "Hey this thing isn't going to be solvent." You know, Twitter doesn't necessarily have to say, look it is solvent. The argument is well you also said you would make it solvent so they have sort of this backstop argument. Even if the entity doesn't appear solvent or there are solvency concerns at the close.

Andrew: I'll just note. Because I think a lot of people who are listening to this podcast, particularly if they-, I feel like I've almost got a mini GED now, not that I've done all that work, but a lot of people might say, well tech stocks are down a lot, Twitter's business model, their Revenue Outlook has gotten a lot worse, like why couldn't they be insolvent? And there are a bunch of reasons. But I think one good one that-, or why couldn't the bank say, "Hey we can't find the step." There are a bunch of reasons, the contract everything we've talked about. But one other reason I think Twitter would say is, "Look, Elon, when you bought us you were saying we're a broken company. I need to take you privately so I can slash your Revenue. Fire everyone and completely shift your business model in a way I couldn't when you're public." And I think Twitter will very easily be able to say, "Hey Elon, the New York Times leaked your business plan, here's your business plan, it called for you to quadruple our Revenue over the next five years. The fact that the next two quarters aren't going to look great. It called for you to fire everyone in due [inaudible] margins. The fact is that right now, our cash flow doesn't look great. None of that matters. You had a plan you know, very similar to-, Elon, in March, you were saying, 'Let's go to defeat the Bots', and then in June, you were saying, 'There are bots on Twitter.' This is a disaster."

Like I just think all of that, like it's going to be very much in Twitter's favor. And the contract here is going to be in favor. The actions are going to be in favor. But that's just one little point that I wanted to throw out there that I think gets lost in all this but they're going to have a lot of like kind of soft-smoking gun evidence on their side if that makes sense.

Lionel: Absolutely, if those projections, that Musk's Ph.D. economics expert puts up on a PowerPoint in front of McCormick. If those projections don't include a 1/3 slash to the Personnel of Twitter, then he's going to have some explaining to do. Because we have seen the sharpen, your swords text messages from Calacanis and the back-and-forth with Musk. And so, you know, you're exactly right. And it goes back to my earlier point, which is, you know, in solvency it closed. And yes, that includes projections about the future. But you know, I've seen a lot of people saying, oh well if the market continues down and you know if we're in this situation in March and then then the projections change. We're not talking about hypothetical projections in 2023 or beyond, we're talking about what we know, what is the plan as of close and as of today that essentially the evidence speaks to, and it speaks to Musk believing that he's going to turn this ship around and he's going to do it while offloading a bunch of the dead weight on the ship.

Andrew: Let me turn to too many conspiracy theories. A public figure as much fun and as controversial as Elon, you know there's always going to be conspiracy theories but both of these are interesting to have implications for the case. Conspiracy theory number one is a little bit easier. With the October 28th deadline to close, it has struck a lot of people that Elon probably needs a little bit more cash to close this deal and he's in a Tesla blackout period because of Tesla's earnings. Tesla reports earnings on October 19th. The Blackout Window lists October 23rd, and October 21st, he can sell five billion of Stock in the next couple of days and boom. We're on October 28th. He's got an extra five billion dollars in cash and he's ready to close Twitter. You know, a lot of people have suggested this day. He's weaponizing the contract all that sort of stuff is Occam's razor that Elon plans to close. His lawyers would never let him make this filing if he didn't plan to close and he just needed a little bit more time to sell some Tesla stock and raise a little bit more cash.

Lionel: Well, I think the timing of this all is pretty conspicuous, right You know, it is sort of just enough time that Musk has asked for in order to achieve that. Look, it's always a bit hazardous to try to step inside the mind of Elon Musk. I'm not an expert on Musk himself, but I think that is a perfectly plausible explanation for why we're here and why October 28th is the day. On Twitter, I certainly would not want to be a Tesla shareholder here.

Andrew: I do have one more conspiracy theory but I want to come back to something I said because you know go back to what I said. Just as a lawyer, you know, scenario one is Elon is planning to close on October 28th. Scenario two is, Elon made a filing to the court and he had some gotcha at the back end. And one thing a lot of people have said to me, I don't know if this is true or not because a lot of lawyers have said, don't trust Elon. His lawyers are really sharp elbow here. But a lot of other people have said, look, if you're a lawyer, you practice in Delaware, there is no chance that you are going to make this filing that says we are ready to close on October 28th. If you do not absolutely mean that. You just cannot do that. Doesn't mean-, I mean, Elon is a person and he can make that file-in and say to his lawyer, "Yes I'm definitely gonna do it." And October 2018 can come around and he could say, "No, screw it. I don't want to." But a lot of them were saying, look, I don't think his lawyers would have been in on some gotcha game that kind of weaponized the Delaware court system. Do you think that's too generous or do you think that's correct, as a former lawyer?

Lionel: Well, current lawyer, yes. No longer at a law firm. Yeah, look, I think it depends-, First of all, it depends on which lawyer you're talking Alex Spyro is his own beast and needs to be discussed separately from the local Council or any of the other attorneys on the Musk team. Spyro, I don't think that would inhibit him from filing this. As for the other attorneys. I don't think that that is such a massive concern. They have alluded to, and I think, even Spyro may have alluded to this in a hearing, that they have a somewhat volatile client. And so, in order, for this to pose a threat to an attorney's license-, In order to say that, you know, they were acting in bad faith. They were sort of enabling the fraud of their client. You have to show that they were doing this knowingly.

And when Musk is your client, I don't think you can really know anything, about his intent and his plans. So I think, if I was a lawyer, I would be hesitant. But as long as I had a paper trail from Musk saying, "Hey, I am working on this, calling up the banks tomorrow." Then that's probably good enough for me because, at the end of the day, you know you have to trust that your clients are at least being honest with you and if they have no reason other than Musk is a volatile character. To question Musk's intent, then that's probably not sufficient to withdraw as counsel.

Andrew: It's a threat that I'm not going to pull on here but you said, hey, as volatile. They probably got a paper trail from Elon that suggested, he wanted to. Now, obviously, attorney-client privilege says, the court won't get to see that paper trail, but if he gave them a paper trail from his banks or from his advisers, that's going to come up in Discovery and Elon is going to run into the old, "Hey, you made this filing on October 7th or whenever that said you're planning to close and then October 28th you didn't-, Twitter's going to find that stuff in Discovery, what changed in the ensuing three weeks."

Last question, because I promised myself we'd get out in under an hour and I'm not sure if we're going to do it. It's just too much fun chatting with you. Too much fun, talking about Twitter. But the last question, it has struck a lot of people that Elon appears very, very scared to get deposed here, right? Maybe it's all coincidence, but his first deposition he puts off because of some very, remote Covid exposure fears. And I think if you go back through Elon's history with Covid, it does not seem like the man is super scared of Covid. And the fears were like, my parents are very, very scared of Covid. And I don't even think my parents would have been worried about that. And then, I think there was one more deposition that got pushed off. And then he threw in the towel and settled, right before his deposition. People don't think that timing is coincidental at all, right?

So it seems like he doesn't want to get to pose here. And there is-, nobody wants to get to pose. But there's also, he's willing to give in 44 billion dollars because he doesn't want to get to pose like those are two different things. So my question is just he was like, "Yeah, it's annoying to get deposed", but it seems like Elon's terrified to get deposed. What could he be so scared of? Because to me the worst case scenario is your deposition goes awful and you have to buy Twitter for 44 billion dollars. Like why's he so scared of getting deposed?

Lionel: Yeah well, I think it's important to note at least in my mind that Elon is not paying 44 billion dollars to not get deposed. I think this case is a loser, regardless of whether or not he gets to pose. So I think not being deposed is sort of the cherry on top or, you know, the consolation prize, I guess is the better term for his getting out of this deal. As for what Musk might actually be concerned about. That is a very tough question. I mean, look, there are all sorts of theories of, you know, Tesla fraud and fraud through his other entities. Would those questions ultimately come out in a deposition? I don't know. They hardly seem relevant to his ability to close on this transaction.

But that being said, look, Musk is a re-litigant in this court. This is not his first appearance at the Chancery and it probably won't be his last. So, I think he's right to be concerned that he could state something that is inaccurate on the record, under oath. And you know, from an evidence perspective, saying something that is untrue under oath, can be used in future cases as a prior inconsistent statement, right? This is something that he is representing to the court. There's a little bit of difference between what you say in a deposition versus what you say when you're on the stand potentially and speaking directly to a judge. But at the end of the day, it is a statement made under oath and Musk knows that he is probably going to be back here. So why give the court, why give future opponents any more ammunition than is necessary?

Andrew: Just to wrap it wrap that up-, So my initial thought was, "Oh he doesn't want to get deposed because he's worried he'd lie, and then he'd go to jail for lying under oath." And obviously, tell me if I'm wrong, but this is a civil case. If he lies on the stand he's not going to go to jail for lying. Now, it's not going to look good for him but the real concern here is, if he lies on the stand if he goes through with deposition, lies in the stand just goes and says, "The sky is red." And all this type of stuff. Yes, he's going to lose this case. But he was already going to lose this case, but in future cases-, Elon has been in court in the past. And guess what? He'll be in court in the future. And in future cases, they'll be able to go and say, "Look, Twitter deposition, you flat-out lied on the stand. You are an untrustworthy witness and nothing you say should be given credit on the stand", basically. Am I kind of reading that correctly?

Lionel: Yeah. And I'll note that the criminal implications of perjury in a civil case. I'm actually-, I'm not tremendously familiar, and I'm fortunate to not be familiar with that. That is something that has never come up in my legal career, nor in anyone, I know, in their legal career. So, I don't know exactly the mechanics of how that would work, but I think you're right about that. Look, Musk is very aware of the fact that he already has multiple litigations going on in parallel. He knows that there will likely be more. And again, he's smart to be thinking about that and to be not giving anyone any more than he really needs to be giving. So again, do I think that is the reason why he's closing the transaction on this timeline? Probably not. I think, he's going to lose this anyway, but it is certainly a silver lining to an otherwise dismal case.

Andrew: Fantastic. Lionel, I think we blew through the hour mark that I was trying to hold us to. Honestly, when we scheduled this, I was like, we'll be able to wrap this up in 30 to 45 minutes, but it's just too interesting, but I always give my guests a last chance, anything that we didn't cover that you think we should have covered or anything that we kind of glossed over that you think we should hit harder?

Lionel: No, I think that that covers the meat and potatoes of it. Thank you so much for having me on today. I really appreciate it. I had a great time and I'm looking forward to future discussions.

Andrew: Hey, well-, Hey, I'm looking forward to hopefully $54.20 at the end of this month, both you and me. Everyone, again, I'm going to include a link to Lionel's substack in the show notes. Lionel will attest, every time I'm looking at perky legal situations and I love to look at perky legal situations, he gets a text message from me like, "Hey take a look at this. I need your opinion." So people should really go check that out. There are a lot of quirky legal situations out there and Lionel does a great job covering them.

So Lionel, looking forward to the next one. Really appreciate all this and we'll chat soon.

Lionel: Andrew, thank you so much.

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