Elon Musk’s on-again, off-again romance with Twitter is headed to trial in the Delaware Chancery Court next month, where the social media company is seeking to force the billionaire to proceed with his $44 billion purchase offer.
Musk has claimed that Twitter failed to disclose the true extent of bots on its site. Twitter has rejected those allegations and is suing to uphold the specific-performance clause in its deal with Musk, which allows it to ask courts to push the deal through as long as Musk’s financing is in hand.
Eric Talley, a professor at Columbia Law School, has been following the whole saga — and trying to quantify the likelihood of each of the many outcomes of the lawsuit.
Talley, an expert on the intersection of corporate law, governance and finance, recently spoke to Grid about why he started tracking the case and how he arrives at his outcomes. This interview has been edited for length and clarity.
Grid: What are these decision trees and probabilities you’ve been assigning to Twitter’s lawsuit against Elon Musk?
Eric Talley: As one of a group of legal academics trying to work through the different scenarios that might unfold, I at some point thought, “I gotta organize these scenarios into different possible outcomes.” I thought with each one of them, I can at least spitball what I think the magnitude of the outcome would be — for example, specific performance pretty much results in shareholders getting $54.20 [per share — Musk’s offer price]. If instead he walks away without having to pay damages at all, it’s whatever the standalone value of Twitter is. So I started spitballing what each of those different outcomes would look like along a “scenario tree” that I thought was reasonably well categorized.
And then I did something that lawyers typically hesitate to do — which is ask whether this is a good case or a bad case on each one of these elements. Typically, in law schools, we are in the business of creating Chicken Littles. They are good at recognizing potential hazards and saying, “Oh, that’s a risk, oh that’s a risk. Don’t do that. Don’t do that.” And I get complaints all the time from business people that while our Chicken Little lawyers are very good at pointing out risks, they are not very good at quantifying them. So that’s what I set about trying to do.
G: How complicated an undertaking did this turn out to be?
ET: I’ve been teaching contract law for a good part of three decades now. I teach a lot of cases. I’ve read a lot of cases. Nothing is really an easy comp to this case. Quite frankly, I don’t think most cases would actually try to go to the finish line like this case seems to be wanting to do.
I tried to get a sense of how to spitball probabilities. It’s something that most lawyers are very cautious about doing, and when I did it, I said, “Look, this is not legal advice, this is not financial advice.”
Once one is willing to spitball some informed probabilities along with what happens at the end of these terminal nodes, you can piece together what a decent price target or price range would be for Twitter, which is effectively a bet on all these different contingencies. If you’re willing to add another layer of speculation on the Musk side, you can also try to triangulate on some settlement ranges, which has become kind of an interesting conversation of late.
G: How did you start to map out this decision tree based on how things have been going over the course of the case?
ET: A lot of people who look at the facts of this case, and the law as we know it, think Twitter’s got a pretty strong case. I’m amongst them. One of the big quandaries that I had in getting into this is trying to understand why it was that the stock price could be hovering in the low $40s or even the mid $30s when it looked like they had such a strong case.
Part of the scenario analysis was to say this thing is overwhelmingly likely to go in Twitter’s direction, but it could go sideways in a bunch of different ways. And if it does, if you start playing out all the trees, a lot of those ways it can go sideways are very bad news for Twitter. It’s not just like they lose a couple of dollars a share, it careens all the way back to whatever the stand-alone value is for Twitter — which could be quite bad at the end of the day. So it’s a high volatility of all of these low probability branches that just completely slam the value of the company.
Playing out the scenarios allowed me to understand and piece together how Twitter could actually be in a great place to win this lawsuit, but the fair market pricing as a company is going to be fairly heavily discounted below $54.20 because it’s trying to aggregate all those low probability but seriously bad magnitude consequences if Twitter doesn’t win and doesn’t get its preferred remedy.
G: How have you assigned weights to each outcome? Is it just what you think is most likely given the arguments either side is making?
ET: Part of this is that when Delaware courts are taking on these issues, they’ve taken them on in a way that makes it relatively possible to predict what the likely scenarios are. And then there’s a whole bunch of background contract-law doctrine about when and under what circumstances material adverse events [MAEs] are produced and fraud gets found and so forth. I’ve done a fair amount of empirical work on MAE provisions. That was informing my sense of to what extent people actually are going to be able to make a reasoned argument that there’s an MAE here, particularly given there are so many things that would fold into that in the drafting of the MAE. So part of this was kind of just doctrinal familiarity with all these areas, both in corporate mergers and acquisitions and contract law. Having done some empirical research myself on what does this contract look like relative to others that have eventuated in litigation — or maybe because the parties knew which way it was going to go, they just quickly settled the matter, because it just didn’t look like this was a winning hand to be playing.
I want to caution you that what I was doing here was informed by empirical work that I’ve done before, but I don’t think this is a case that lends itself incredibly well. We can’t just assume every prior case is a clone of the Musk case and count up how they’ve come out, and assume this is going to come out the same way. There are judgment calls going on here. When I made my judgment calls, I did make one operating assumption, which is that the Delaware courts both have an incentive to and are credible in their undertaking to play this by the book and not to get bowled over by the fact that this is Elon Musk and the rules are different for Elon Musk.
I think some of the arbitraging that’s going on in this area is fundamentally a bet about that. It’s not really a bet about whether Twitter has a bad case, or whether the probability of the various modalities is much higher than on the merits. I think part of it is this kind of market segment, which is not small, who has seen year after year Elon Musk basically sort of playing by rules that other people don’t play by and conjecturing, “Well, that might apply to the court system in Delaware as well.”
That may be one area where if I’m wrong about my presumption there, about the Delaware courts having a very strong incentive over the long term to play this by the book, then a lot of those probabilistic assessments are also going to be to Twitter-favoring.
Thanks to Lillian Barkley for copy editing this article.