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