The week in review: $TWTR $GOGO $BUR
All week I was hoping for major updates across the 3 cases I’m currently covering, but alas, hope is not a strategy. We will have to settle for 1/3.
v. Argentina:
We’ll start with the easiest one first. After months of waiting for a summary judgment ruling, we’re… still waiting. Much like your in-laws at the holidays, Judge Preska’s ruling could show up at literally any time. The share price has moved almost 15% down since I published my article, but there’s not much to read into that, for now. The stock is thinly traded (averages about 140k shares/day on a float of about 190mm), so swings like this are to be expected, and it may be hard to get an order filled at depressed prices. I still believe it’s a near term buying opportunity, though I have not added to my position. Given the general market volatility in the last few weeks, I’m saving some dry powder for a possible leg lower or an underappreciated case notification.
Smartsky v. :
Pacer says we got a case assignment, but we don’t have the written order yet, so again, major updates here will also have to wait. Like , the share price has seen consistent declines in the last couple of weeks, with the only glimmer of hope being Friday’s close. Chart gurus have told me we could see an 11-handle, but I’m not going to count on that significant a buying opportunity. My price target of $25-30 is holding firm, so this decline hasn’t kept me up at night.
v. Musk:
It was another eventful week for Twitter v. Musk, or as I’m going to be referring to it from here on out “Terminator III: The ultimate termination-ing.”
That’s right, Musk filed a third notice of termination on Friday. Earlier in the week, Matt Levine asked the prescient question, “Does Elon Musk Know How Mergers Work?” Friday’s events answered Levine’s prophetic inquiry with a resounding “no.”
What’s the newest termination about? Twitter paid Peiter “Mudge” Zatko severance of $7.75 million, allegedly in violation of Twitter’s obligations to maintain the “ordinary course” of business. It’s an admittedly steep severance payment to a man who only served for 14 months before departing.
You might be asking why the severance payment matters at all, given that Mudge Zatko left Twitter back in January—well before Musk signed the merger agreement. However, it wasn’t until 2 months after signing the merger agreement, on June 28, that Twitter and Zatko signed a concrete separation agreement.
Does Musk have a leg to stand on here? Article VI, Section 6.1 of the Merger Agreement requires that Twitter use “commercially reasonable efforts to conduct the business of the Company and its Subsidiaries in the ordinary course of business” (emphasis added). Section 6.1(e)(ii) adds additional detail around severance payments:
For those whose phones hit a zoom-in limit, the section reads:
“except as required pursuant to existing Company Benefit Plans . . . [Twitter shall not] grant or provide any severance or termination payments or benefits to any Company Service Provider other than the payment of severance amounts or benefits in the ordinary course of business consistent with past practice and subject to the execution and non-revocation of a release of claims in favor of the Company and its Subsidiaries” (emphasis added).
Is the payment to Zatko consistent with past practice?
Allegedly, for the average Twitter employee, severance packages have been around 3 months’ pay. I don’t know what Zatko was being paid at Twitter, though based on (potentially unsound) net worth data, it would appear the $7.75mm is a lot more than his Twitter salary. But Zatko wasn’t an average Twitter employee. Zatko was Head of Security, and his comp was surely a combination of cash and equity. To measure severance against his salary alone would be unfair, as the $7.75mm is likely a result of immediate vesting of future stock options upon termination. Also, a big payout for exiting leadership is hardly unprecedented. Back in 2015, Twitter was talking about a $37mm severance payout for then-CEO Dick Costolo. Costolo ended up leaving without severance (don’t shed a tear for him, he still pocketed over $300mm in the Twitter IPO), but it adds color to Twitter’s history of severance nonetheless. Current-CEO Parag Agrawal is set to net $42mm in a golden parachute severance package if the deal goes through. Again, it’s color.
My opinion is that this, like Musk’s other arguments, is likely a losing battle. Twitter will provide a list of all terminated employees for whom Twitter granted immediate vesting as part of a severance package, and that will be that.
So what else happened in the case this past week? A lot.
Tuesday saw the parties battling in oral argument over not one, not two, but five issues. There’s a lot to say about how the hearing unfolded, but the long-and-short is that Chancellor McCormick continues to be the star of the show. Not only has she demonstrated an unwavering ability to grapple with intricate legal issues and technical details of the case related to mDAU and security, she has done so at a rapid, almost superhuman clip. On Wednesday, while I was still processing the oral arguments from the day before, McCormick issued rulings on the majority of the arguments.
The results were mixed, but should be seen as an overwhelming victory for Twitter. Musk is allowed to amend his counterclaims (which he has done under seal, with redacted version to be available this week), but the trial date of October 17 remains the same.
It’s a smart move by McCormick. Denying the motion to amend the pleadings would have been a potentially reversible issue on appeal. It was a high bar for Twitter to succeed in opposing such a motion. But the ultimate outcome at trial is unlikely to change. McCormick is drawing the lines of discovery on Zatko-related issues narrowly, saying
If Musk thinks he’s getting a fishing expedition, he had better set his expectations at “collecting guppies in the local stream” rather than “deep sea fishing for Marlin off the coast of Florida.”
There’s more to glean from the hearing—and from the rulings—than just the outcome though. If McCormick had any patience left for Musk’s counsel prior to Tuesday’s hearing, that patience has since evaporated. During the hearing, Musk’s counsel claimed that Musk’s failure to conduct due diligence was consistent with one of the greatest investors of all time, saying
“Warren Buffett doesn't do due diligence. Nobody knocks Warren Buffett or says he should ask for diligence.”
McCormick tossed Twitter a softball in response, asking
“. . . Warren Buffett doesn't conduct due diligence?”
Wachtell’s Bill Savitt swung for the fences and made clean contact.
“diligence is what you do before signing, not after.”
Musk’s counsel separately argued that Musk is entitled to a broader set of discovery because McCormick “failed to misapprehend the low-hanging fruit” in Musk’s discovery request. Telling anyone they’ve failed to appreciate the easiest-to-comprehend arguments is always a bit of an insult, but for McCormick, who has demonstrated unparalleled comprehension at every turn, the accusation was nothing short of a slap in the face. She responded sharply,
“I didn’t overlook or misapprehend the ‘low hanging fruit’ request.”
It was a marked departure from her tempered, almost soft-spoken demeanor, and should be acknowledged in context of Twitter’s accusations of gamesmanship (not to mention bad faith). Her quip found its way into her ruling the following day as well:
As for other key events—
The Twitter shareholder vote is this Tuesday, and if the result isn’t an overwhelming approval of the merger then I’ll eat my boots. Musk’s amended counterclaims will also become available early this week, though again, it’s likely to be a lot of chest thumping and not a lot of substance. For now, my eyes are fixed on October 17.
I added to my position on Tuesday during the hearing. It now makes up approximately 12% of my portfolio. McCormick's affirmation of the October 17 trial date has eased most of my concerns about extensive delay.