A tale of two transactions: the importance of due diligence
A day hasn’t gone by at Elon’s Twitter where there hasn’t been controversy.
From a simple exchange that read: “I love Twitter … How much is it?”, we’re now way into the Musk Twittersphere. Although with all the financial and structural issues highlighted over the period, some may ask “did Elon even research the company in the first place?”
That’s where due diligence comes in… or should have.
The process of due diligence is a bit like dating. For the target, it involves teasing your assets for inspection by an interested bidder. Fail the inspection, no bid. Waiving it is a bit like jumping in headfirst and then discovering things aren’t as they seem.
In April of 2022, Musk offered $54.20 per Twitter share or around US$43billion for the lot. This offer was unanimously accepted by Twitter’s board. This is where the fun begins.
Twitter reported in a filing that they had found the platform had under 5% of bot users. Musk – purportedly suspicious of such claims – requested “details supporting calculation that spam/fake accounts do indeed represent less than 5% of users“, alleged the number was closer to 20%, and tried to back out of the deal. By May the deal was “on hold”. By July it was on the rocks.
In issue; that April offer. Musk waived his right to conduct due diligence. But of course, that’s not the end of the story. By October, under the threat of continued legal proceedings, Musk reluctantly returned to the table.
Judge Kathaleen McCormick of the Delaware Court of Chancery noted that the whole thing could have been avoided if due diligence was performed and not waived by Musk.
Morale of the story: do your due diligence!
The opposite could be said for ‘CZ’, the owner of Binance, who famously backed away from an acquisition of the notorious now-collapsed FTX crypto exchange (… excellent choice, in hindsight!).
Binance announced its plans to acquire its biggest competitor in November of 2022.
FTX had slowly become a giant in the crypto exchange market – becoming number 2 behind CZ’s own Binance – but after leaked documents began circulating about FTX’s dirty deals, the seasoned crypto kingpin pulled the pin on the nascent acquisition.
Interestingly, that rug pull happened quickly – only a day after announcing its plans to acquire FTX. CZ and Binance later cited “corporate due diligence issues” such as mishandling of customer funds which later turned out to be FTX using customer funds to cover for risky bets and debts from Alameda Research.
Both issues show the importance of due diligence before an M&A transaction. While due diligence processes are arduous they save parties from future headaches and surprises. Someone probably should’ve told Elon this before he decided to buy twitter.
For more check out Episode 80 of the podcast: Careful What You Wish For: Limiting or Waiving Due Diligence in Private Mergers and Acquisitions. While you’re at it, Hearsay also explored the FTX collapse on the Sidebar. Check out that episode here.
By: Hearsay The Legal Podcast with research by Ben Nguyen.