Elon Sues The Lawyers That Forced Him to Buy Twitter
Elon Sues The Lawyers That Forced Him to Buy Twitter
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00:00 Buying Twitter might be the worst thing
00:01 to ever happen to Elon Musk,
00:03 but the best thing to happen to people
00:04 who love crazy lawsuits.
00:06 And now Elon is suing the lawyers
00:08 who forced him to follow through with the sale
00:10 because he thinks that they charged Twitter
00:11 too much to beat Elon Musk
00:13 because now Elon owns Twitter
00:16 and he's the one that effectively has to pay for it.
00:18 You really can't make this up.
00:20 But of course, it's more complicated than that.
00:22 Now, apparently, Musk is still smarting
00:24 from the time that he was forced to honor his deal
00:26 to buy Twitter for $44 billion.
00:28 So now he has filed a lawsuit against the law firm
00:31 of Wachtell, Lipton, Rosen, and Katz,
00:33 the law firm which represented Twitter
00:35 when the old owners sued Musk
00:37 to follow through with the sale.
00:39 Wachtell charged Twitter $90 million
00:41 to facilitate the deal that eventually led to Musk
00:43 taking Twitter private.
00:44 Now, the old Twitter board paid $84 million
00:46 right as the deal closed,
00:47 literally 10 minutes before the company turned over to Musk.
00:50 And now Elon would like all of that money back, please.
00:53 - Money, please.
00:55 - Now, to review, this was a sale
00:56 between a public company and an individual
00:58 who intended to take the company private.
00:59 Musk offered Twitter a share price
01:01 of $54.20 per share,
01:04 and Twitter's board accepted the deal.
01:06 Musk then tried to back out of the deal
01:08 for reasons relating to him being a huge idiot.
01:11 And essentially, Musk failed to do his due diligence
01:13 before making the offer and later realized
01:15 that his offer was way too high.
01:16 Or maybe it dawned on him
01:17 that trying to make Twitter profitable
01:19 was going to require a lot more
01:20 than just shitposting on Twitter.
01:22 So he tried to get out of it.
01:23 Now, Wachtell wasn't Twitter's original law firm
01:25 for the sale.
01:26 But when Musk said that the deal was dead
01:28 and tried to back out,
01:29 Twitter turned to this law firm,
01:30 which has a reputation as one of the world's top law firms
01:33 specializing in mergers and acquisitions.
01:35 - I'm into murders and executions mostly.
01:38 - Wachtell promptly sued Musk
01:40 in the Delaware Court of Chancery,
01:41 and he backed down without even getting a discount
01:43 on the original sale price.
01:45 Basically, they spanked him.
01:46 Now, right before the deal closed,
01:48 Twitter paid the law firm $90 million in success fees.
01:52 Elon Musk believes that this is unjust enrichment,
01:54 and the firm should give most of that back to Twitter,
01:56 which he now owns.
01:58 And the timeline breaks down like this.
01:59 Twitter hired Wachtell on June 21st, 2022.
02:02 The law firm sent an engagement letter
02:04 stating it would represent Twitter, quote,
02:05 "On an hourly fee basis in a litigation
02:07 "to compel specific performance
02:09 "of the Musk party's acquisition of Twitter."
02:12 This engagement letter doesn't contain any language
02:14 about a success fee.
02:15 Now, the engagement letter indicates
02:16 that Wachtell negotiated an exemption
02:18 from Twitter's usual fee arrangement with outside counsel,
02:21 which gave Twitter a 15% discount on hourly billing rates.
02:25 And in the months of work
02:26 after making this arrangement with Twitter,
02:28 Wachtell invoiced Twitter for a total of $18 million,
02:31 including $15.6 million in hourly fees.
02:34 Musk characterizes that as outrageous
02:37 because it was only for a few months of work.
02:39 Now, what the complaint leaves out
02:40 is that during those few months,
02:42 Wachtell filed a lawsuit against Musk
02:44 that successfully compelled him
02:46 to go forward with the sale.
02:47 And the lawsuit was filed on July 12th, 2022.
02:51 By October 4th, 2022,
02:52 Musk gave up his fight to back out of the sale,
02:55 and he agreed to abide by the deal's original terms,
02:58 and the closing was set for October 28th.
03:00 Now, according to the complaint on October 27th,
03:02 with, quote, "The firm's work on the merger litigation
03:05 "in the Delaware Chancery Court already concluded,
03:07 "and without any foreseeable need
03:09 "for Twitter to utilize its services again,
03:11 "Wachtell, the law firm, decided to milk the company
03:14 "for $90 million in success fees."
03:16 Musk says, quote, "In other words,
03:18 "Wachtell sought and obtained a success fee
03:20 "that resulted in a total fee
03:22 "nearly six times its $15.6 million
03:25 "in invoiced hourly fees for a few months' work,
03:28 "even though, one, it was not called for
03:30 "by any prior agreement with Twitter,
03:31 "and two, the litigation in which Wachtell
03:34 "represented Twitter had been stayed for weeks
03:36 "in anticipation of dismissal following the closing."
03:39 Now, you might be asking why a success fee
03:41 is even a thing, and why a company would agree
03:44 to pay a success fee over hourly billing.
03:46 Well, many clients are concerned
03:47 that outside law firms run up billable hours
03:49 by overstaffing cases with too many lawyers
03:52 or generating work that isn't necessary.
03:54 And the theory goes that if you align
03:56 the financial incentives of the client and the law firm,
03:59 the law firm is less likely to do a bunch
04:01 of unnecessary work and waste the client's money.
04:03 And Bloomberg reports that Wachtell was, quote,
04:05 "one of the first law firms to link its fees
04:07 "to the value of successful deals
04:09 "rather than linking them to hourly billing rates
04:11 "like many of its peers."
04:13 And in this way, the law firms are acting more like banks,
04:16 which tie their fees to a percentage of the deal
04:18 when it's completed.
04:19 And the exhibits attached to the complaint
04:20 include a memo from Wachtell explaining the quote,
04:23 "While our fees are not based on the amount involved
04:25 "in a matter, experience indicates that merger
04:27 "and acquisition and takeover fees have typically ranged
04:30 "from 1% or more on matters under $250 million
04:34 "and 0.1 of 1% or less on matters over 25 billion."
04:39 Wachtell argues that the value of its advice
04:41 can't be demonstrated by a simple hourly rate.
04:44 That's a classic line from lawyers.
04:46 Absolutely always the case.
04:48 - I'm like a God in human clothing.
04:50 Lightning bolts shoot from my fingertips.
04:53 - But the difference here is that Wachtell
04:55 didn't start out the engagement
04:56 with a success fee specified.
04:58 And Musk's complaint is that it was improper for Wachtell
05:01 to switch from an hourly billing arrangement
05:03 to a success fee structure on the eve of closing.
05:06 Yeah, this is one of those cases
05:07 that's gonna be really fun to watch
05:08 because at the end of this case,
05:09 at least one of these parties is going to lose.
05:12 Now, Musk's first claim is for unjust enrichment.
05:15 He claims that the closing day letter agreement
05:17 between the board of directors and the law firm
05:19 "called for payment of an unconscionable fee
05:22 "and was an unconscionable agreement."
05:24 Musk argues that Twitter's board of directors
05:26 were a bunch of losers who got totally hosed by the law firm.
05:28 The complaint describes them as "lame duck fiduciaries
05:32 "who lost their motivation to act
05:33 "in Twitter's best interest during the sale."
05:36 Though one would argue here the complete opposite,
05:38 that the board was in fact extremely motivated
05:40 to close the sale at the original price,
05:43 which arguably was in the best interest of the shareholders.
05:46 But Musk's perspective is that it was clearly not
05:48 in Twitter's best interest
05:49 to have paid this enormous legal bill.
05:51 But that misunderstands what their duties actually were
05:54 between signing and closing.
05:55 Their legal fiduciary duty was to make sure
05:57 that the deal maximized the value for Twitter's shareholders.
06:00 That's all they had to do.
06:02 And the lame duck fiduciaries
06:04 executed that responsibility beautifully
06:06 by forcing Musk to buy Twitter
06:08 at an extremely high share price.
06:09 And if they accomplished that,
06:11 then the shareholders didn't care
06:12 what else Twitter did with its money
06:14 because it was no longer theirs.
06:15 And in fact, because the share price
06:17 was already set by Elon Musk,
06:19 it didn't really matter how much they paid out
06:21 to the lawyers because that wasn't going to change
06:23 how much the shareholders ultimately got.
06:26 Though it really made a big dent in Elon Musk's pocket
06:29 when he had to pick up the pieces of Twitter
06:31 when he bought it.
06:32 And yes, $90 million is a lot of money,
06:35 but were the lawyers' fees beyond the pale
06:37 in this particular case?
06:38 Well, in contract law,
06:39 if the terms of a contract are unfair
06:41 or oppressive to one party
06:42 in a way that suggests abuse during its formation,
06:44 a court can find it unconscionable
06:47 and refuse to enforce it.
06:48 But courts rarely find unconscionability
06:50 in the business dispute between two fairly equal parties.
06:53 A contract is most likely to be found unconscionable
06:55 if both unfair bargaining
06:57 and unfair substantive terms are shown.
06:59 And generally, courts only void a contract
07:01 on unconscionability grounds in extreme cases.
07:03 There's one famous case where a loan interest rate
07:06 was 800% or an instance where a warranty expires
07:11 before a product is even installed.
07:13 Basically things that really shock the conscience.
07:16 Not really things like a relatively high bill
07:18 for litigation that won billions of dollars,
07:20 but you know, your mileage may vary.
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07:23 my firm, The Eagle Team, is now accepting new clients
07:26 and we don't charge $90 million.
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07:30 or medical malpractice, or just about anything else,
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07:36 Just click on the link in the description
07:37 for a free consultation with my team.
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07:41 you need The Eagle Team.
07:42 The link is down below.
07:44 And now back to Elon Musk.
07:45 Now, Wachtell is one of the premier
07:47 mergers and acquisitions firms
07:49 and its partners make serious bank
07:50 by charging success fees.
07:52 And in the firm's fee arrangement memo,
07:53 Wachtell outlined its comparables,
07:55 explaining that its success fees
07:57 generally range from 67% to 100%
08:00 of the investment banking fees.
08:01 And the memo also says that the fee
08:03 could be a multiplier of its hourly billing or run rate.
08:06 And during the first four months,
08:07 the lawyers billed $26.6 million
08:10 and the success fee is about 2.5 times that amount,
08:13 which was within comps Wachtell gave to Twitter.
08:15 And the banks, JP Morgan and Goldman Sachs,
08:18 got 133 million with 113 million of that
08:22 as a success fee when the buyout closed.
08:24 So the $90 million that Musk complains about
08:27 was around 68% of the banker's fees,
08:29 which is actually on the lower end of comparables,
08:32 if you are to believe Wachtell.
08:34 But Musk argues that the success fee is too much
08:36 because litigation didn't move forward
08:39 and Wachtell wasn't the law firm involved
08:40 in the original negotiation between Musk and Twitter.
08:43 And that's an argument,
08:45 but it's probably not particularly strong.
08:47 To prove his point, Musk states that the work
08:50 that the lawyers did wasn't particularly hard
08:52 since it was just a garden variety contract dispute.
08:54 Quote, "There were no novel or difficult questions
08:57 "of law involved, nor did the litigation require
08:59 "any special skills beyond that which Twitter
09:01 "could have procured by paying hourly rates
09:04 "to many other reputable law firms
09:05 "with the experience litigating
09:07 "in the Delaware Chancery Court,
09:09 "including those hired to work alongside Wachtell."
09:11 Now, this argument is particularly hilarious
09:14 because Musk is actually admitting
09:15 that the legal questions weren't that difficult
09:17 because he really didn't have any legal basis
09:20 for backing out of the deal.
09:22 Basically, that his litigation was frivolous.
09:25 And if Musk had simply done what he was supposed to do
09:28 by consummating the deal in the first place,
09:30 Twitter wouldn't have to pay a success fee at all.
09:33 And of course, Twitter's board was obviously pleased
09:35 that Wachtell helped it close the deal
09:37 at the original price.
09:38 And if Twitter had renegotiated the deal
09:40 so that Musk had to pay a lower share price,
09:42 the shareholders would have lost billions of dollars,
09:46 far more than the $90 million
09:48 that they paid in the lawyer fees.
09:50 And the deal, of course, closed at $44 billion,
09:52 which means that the success fee wound up
09:54 being about 0.2% of that eventual deal.
09:58 So yeah, it's arguable that the success fee
10:01 helped Twitter save a lot of money
10:02 and that the board probably feels pretty good about it.
10:04 And in fact, success fees are so normal
10:06 with mergers and acquisitions
10:08 that Musk's own law firm, Reed, Collins, and Tsai,
10:10 the lawyers handling this case for him, also charged them.
10:13 But on the other hand,
10:14 it's possible that Musk has a reasonable argument here.
10:17 He argues that the success fee is unconscionable in part
10:20 because the firm's work had already been done.
10:23 Therefore, there couldn't be an enforceable contract
10:25 to pay effectively an additional $90 million
10:29 because again, the work had already been done.
10:33 Now, consideration in contracts refers to the benefit
10:35 that each party receives in exchange
10:37 for what it gives up for a contract.
10:40 Gratuitous promises, aka gifts, are not enforceable.
10:44 So a promise to let someone borrow your car
10:46 is not enforceable.
10:47 But a promise to let someone borrow your car
10:49 in exchange for $100 absolutely is.
10:52 And similarly, if you want to modify an existing contract,
10:55 you need some new consideration, generally speaking,
10:58 in order for that modification of the contract to stick.
11:01 Consideration can be big or small
11:04 as long as the parties mutually agree
11:05 to exchange something between themselves.
11:07 And right now, all the lawyers watching this video
11:09 are shouting the word peppercorn at the screen.
11:12 Because in law school, you learned that consideration
11:15 can be something as small and insignificant
11:17 as an actual peppercorn.
11:19 Though these days, that is a metaphor
11:21 for just something that is very small
11:23 that you're giving up.
11:24 Now, this could be a good argument for Musk.
11:27 In the original fee agreement,
11:29 Twitter agreed to pay the law firm for services
11:31 that would be billed hourly.
11:32 And at the last minute,
11:34 Twitter agreed to pay $90 million for a success fee.
11:37 And it's possible that this was improper.
11:40 A fee agreement needs to spell out the services
11:42 that a lawyer is performing for the client,
11:44 outline the type of fees that it will charge,
11:46 and give the client an idea
11:47 of how much they can expect to pay.
11:49 And in this case, Musk has a point
11:50 that Wachtell can't change the original terms
11:53 of the agreement without consideration.
11:55 So how might Wachtell defend itself?
11:57 Well, Joe Patrice over at Above the Law
11:58 suggested that from Wachtell's point of view,
12:00 this wasn't changing the terms
12:01 of the original agreement per se.
12:03 He suggested the firm might have been, quote,
12:05 "opening new talks on the comprehensive fees
12:07 "involved in both litigating and advising on a deal."
12:10 And under this theory, Wachtell concluded
12:12 that its role in litigation was complete, as Musk said,
12:15 but that they needed a new arrangement
12:17 to compensate the firm for its role
12:19 in advising Twitter during closing.
12:20 And that's definitely a possibility,
12:22 but so far we don't know if that's what Wachtell
12:24 and the old Twitter owners were actually thinking.
12:26 And we certainly don't know Wachtell's side of the story
12:29 or the old Twitter board's side of the story.
12:31 Wachtell could legitimately argue
12:33 that it had to advise the company
12:34 on any last minute maneuverings by Musk,
12:36 and that work, providing advice to Twitter
12:39 before the deal closed, could constitute consideration.
12:42 And again, getting $90 million for providing
12:45 a little bit of advice seems exorbitant,
12:47 but legally the consideration can be
12:49 almost anything of value.
12:51 And consideration will only be considered inadequate
12:54 if it's really worthless.
12:56 But right now we're only privy to the allegations
12:58 of the complaint and the exhibit,
12:59 so it's very likely that there is a lot more
13:01 relevant communications here
13:03 than what was attached to the complaint.
13:05 Though additionally Elon Musk says that the fee
13:07 violated the ordinary course covenant
13:09 that was found in the merger agreement,
13:10 he suggests that Twitter employees,
13:12 including the outgoing board of directors,
13:14 were up to corporate sabotage.
13:15 The complaint says that, quote,
13:16 "Fully aware that nobody with an economic interest
13:18 "in Twitter's financial well-being was minding the store,
13:21 "Wachtell arranged to effectively line his pockets
13:23 "with funds from the company cash register
13:25 "while the keys were being handed over to the Musk parties."
13:28 But remember, Twitter had to hire Wachtell
13:31 because Elon was trying to get out
13:32 of the merger agreement in the first place.
13:34 And Musk complains that right before the deal closed,
13:36 these stupid people met to approve the fee request
13:39 despite a Musk directive to halt all payments.
13:41 Quote, "The closing day directive
13:43 "was an unequivocal statement
13:44 "on behalf of Twitter's residual claimants
13:46 "of the corporation's preference
13:47 "to pause outbound payments pending that day's closing
13:50 "so that the company's new owner
13:52 "could have a reasonable opportunity to review such payments."
13:56 So Musk is arguing that they shouldn't have approved
13:58 the fee in part because he had no intention
14:00 of paying the bills that Twitter already owed.
14:02 But the company didn't have to follow Elon's directive
14:04 until he actually owned the company and not a moment before.
14:08 So Twitter paid the fee right before the deal closed,
14:11 like literally minutes before the deal closed.
14:13 And Musk thinks that this timing is nefarious
14:15 and that they intended to keep the payments secret.
14:17 And now it's true that Twitter executives
14:19 didn't have much incentive to pay the lawyers
14:21 the lowest fees that they could get away with.
14:23 But on the other hand,
14:24 they also weren't sure that the deal would close
14:26 until the day that it actually did.
14:28 So if the Twitter executives made too many crazy decisions
14:31 that cost the company tons of money,
14:32 they'd be screwing themselves over
14:34 if Musk decided to litigate instead of closing
14:36 because they'd need to run a company
14:38 that was seriously hampered by all the bad deals
14:40 that they did.
14:41 But there's also the fact that Musk has a long history
14:43 of stiffing people he owes money to.
14:45 And relying on your personal history of breaking contracts
14:48 seems like a weak argument.
14:49 So Musk would have been in a much better spot
14:51 if he claimed that the $90 million in fees
14:54 was outside the ordinary course of business
14:56 and refused to move forward with the sale
14:58 with that payment in place.
15:00 But of course, he famously moved forward with the deal
15:02 and paid $44 billion and now proudly owns a company
15:06 that's worth a fraction of that.
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