Elon Musk tried to own the libs so hard that he ignored basic legal advice from skilled transactional lawyers. When he realized he didn’t actually want to consummate the deal, Twitter hired Wachtell to sue Musk in Delaware in a slam-dunk litigation. Since then, Musk turned $44 billion into $15 billion (and falling) and has resorted to sending empty legal threats. The moral is… listen to your lawyers.
That’s what Twitter did during the acquisition, and that’s the subject of Musk’s latest bid for some kind of win. Well, his latest bid for some kind of win is a dick-measuring contest, tough talk for a guy whose mommy just stepped in to protect him from a fight.
But his mother hasn’t stopped him from filing a lawsuit against Wachtell, seeking to clawback the fees the firm racked up representing Twitter and forcing Musk to go through with the Twitter deal.
Wachtell exploited a corporate client left unprotected by lame duck fiduciaries who had lost their motivation to act in Twitter’s best interest pending its imminent sale to Elon Musk and his entities, X Holdings I, Inc. and X Holdings II, Inc.
I suppose we can all agree on one thing: it was absolutely not in Twitter’s best interest to make Musk buy the company. Though it was in the best interest of Twitter’s former shareholders and that’s the constituency the fiduciaries actually served at the time.
The crux of the complaint is that Wachtell shifted its fee structure from hourly billing to feature a “success fee” payable upon the firm securing Musk’s compliance in shelling out $44 billion for the company. At that point, the roughly $17 million that Wachtell had billed by the hour transformed into $90 million.
SCANDALOUS!!! Why would a company agree to such a wild fee arrangement that pays the firm so much more than the hours billed? Well, as one firm put it…
We believe that success-fee arrangements are the best way to synchronize the interests of the client and the lawyer. By in essence betting on ourselves, we make the client’s main priority, which is to achieve a favorable result, our own main priority.
Once engaged, we think about each case as if we were the client. Whereas traditional law firms and most of our competitors often have large cadres of associates who are focused on maximizing billable hours and generating fees, our trial teams are dedicated to one thing: preparing our clients’ cases for trial. Our fee arrangements are based on the notion that our compensation is tied to our clients’ success. Their win is our win too.
That’s from Reid Collins & Tsai… who represent Musk in this case.
While the complaint they drafted brands the payment as “unconscionable,” $90 million in exchange for making the company’s shareholders $44 billion seems like a sweet deal. It’s a 0.2 percent contingency fee! It may make headlines to point out that this one matter accounted for around 10 percent of the Biglaw firm’s gross revenue, but that’s how it goes when firms handle arguably the highest profile non-Con Law litigation in the world last year on contingency.
So what is the basis of this complaint? Musk’s arguing that the deal breached California ethical rules because success fees must be negotiated at the outset of an engagement and Wachtell and Twitter had agreed to an hourly arrangement at first.
This is a fair argument but the deeper one gets into the complaint, the more complicated it becomes. After Musk relented to buying Twitter, the line between litigation and M&A started to blur. Wachtell, presumably, participated in those discussions as part of getting the client to the finish line while preserving its rights in court if Musk tried to pull out again.
And the complaint seems to acknowledge this:
Wachtell’s October 20 fee memo to Sean Edgett stated, “You have asked us to supply information regarding fee arrangements comparable to the arrangements contemplated in WLRK’s Twitter engagement.” See Exhibit 7. The memo first discussed “Engagement fees as a percentage of banker fees,” claiming that “[a]s we discussed, in engagements related to pending transactions as to which a premium fee is contemplated, our Firm often receives a fee in the range of 60 to 80 percent of the fees paid to investment advisors.”
This sounds like a transactional agreement. So, was the firm really changing the terms of its litigation engagement or opening new talks on the comprehensive fees involved in both litigating and advising on a deal?
The complaint notes that the October 20 memo doesn’t explicitly spell out this distinction, though the fact that there’s even a colorable reason why a firm might seek a new fee structure seems troubling for Musk’s case. The complaint criticizes the idea that Wachtell could seek a success fee after “deal closing was imminent,” given the “extremely unlikely event that the merger failed to close at the last minute” even though the buyer HAD ALREADY FORCED EVERYONE TO COURT FOR NOT HONORING AN IRON-CLAD AGREEMENT ALREADY.
The complaint opines that Twitter is an unsophisticated party exploited by the much smarter lawyers and… good luck with the “legal officers for global tech company as widows and orphans” argument. But failing that, the complaint argues that the Twitter executives were disgruntled and openly defying closing directives:
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.”
This wasn’t the intent of the allegation, but “the former executives were on notice that we intended to breach the company’s contractual obligations” isn’t the killer argument Musk thinks it is.
And, abstracted from the technicalities, is the whole issue. To what extent can a disgruntled buyer clawback the funds spent forcing him to buy the company? Because if that’s the precedent, why would any firm represent a target corporation? The firm would essentially be agreeing to a “failure fee,” only able to guarantee payment if it failed to close the deal and open the door for the acquirer to void the engagement terms.
Obviously, there can be some hypothetical scenario where a law firm is really trying to unethically screw over the acquirer. But the standard for enforcing that sort of second-guessing has got to be awfully high.
Like, this kinda high.
Earlier: Elon Musk Sends Legal Threat To Facebook And Once Facebook Finishes Laughing I’m Sure They’ll Get Right Back To Him
Twitter Complaint Demonstrates That Every Lawyer, Everywhere, Always Is Smarter Than Elon Musk
Elon Musk Will Beat Twitter! WSJ Says It’s Obvious… Assuming You Change Every Single Fact And Law.
Joe Patrice is a senior editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you’re interested in law, politics, and a healthy dose of college sports news. Joe also serves as a Managing Director at RPN Executive Search.