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Editorial 7 MIN READ

The Twitter merger agreement as a Delaware deal-terms master class

What founders can learn from the April 25 agreement before they ever raise

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 6 sections
  1. What the merger agreement actually does
  2. Why the MAE clause almost never gets a buyer out
  3. Specific performance and the reverse termination fee
  4. Interim operating covenants and the obligation to close
  5. What founders should take from this before they raise
  6. Sources

n April 25, 2022, Twitter, Inc. signed an agreement to be acquired by an Elon Musk acquisition vehicle for $54.20 per share in cash, $44 billion of equity value, governed by Delaware law and committed to the Court of Chancery. Six weeks later, with the buyer publicly airing doubts about bot counts and the transaction not yet closed, the agreement itself is the most widely read primary document in American deal practice this year.

That document, filed as Exhibit 2.1 to Twitter's 8-K on April 25, is a useful thing for founders to study before they ever take their first priced round. It contains, in working order, almost every Delaware contract device a venture-backed company eventually has to negotiate: a narrow material-adverse-effect clause, specific performance backed by language the Chancery will enforce, a reverse termination fee calibrated to the equity commitment, and interim-operating covenants that assume a buyer who bargained in good faith. Each one has case law behind it that any founder signing a term sheet should at least know exists.

What the merger agreement actually does

Twitter and its buyer entered a reverse triangular merger under 8 Del. C. § 251, the Delaware General Corporation Law's workhorse merger statute, which requires board approval, a stockholder vote for the target, and filing of a certificate of merger with the Division of Corporations. The agreement is a cash-out merger; no Twitter security survives except the right to receive $54.20.

The terms worth studying are the ones allocating risk between signing and closing, because that is where deals blow up. The agreement's definition of "Company Material Adverse Effect" is the first. It follows the post-2010 Delaware template: a long list of carve-outs (changes in general economic or market conditions, changes affecting the industry generally, changes in law, pandemics, acts of war, failure to meet internal projections) that only count toward an MAE if they affect Twitter "disproportionately" compared to similarly situated companies. The point of that structure is to allocate systemic risk to the buyer and company-specific risk to the seller, which is how Delaware courts have read these clauses since IBP, Inc. v. Tyson Foods, Inc., 789 A.2d 14 (Del. Ch. 2001). Vice Chancellor Strine's opinion in IBP treated the MAE as protection only against "unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner."

The "durationally-significant" language is doing load-bearing work in every MAE fight since. A quarter or two of bad earnings is not an MAE. A multi-year impairment to earning power, unique to the target, might be.

Why the MAE clause almost never gets a buyer out

Between IBP in 2001 and today, Delaware has decided exactly one litigated MAE case in the buyer's favor. That case is Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018), aff'd, 198 A.3d 724 (Del. 2018) (TABLE). Vice Chancellor Laster found that Akorn's business had "fallen off a cliff," with year-over-year EBITDA declines of 86% in one quarter, compounded by serious data-integrity problems at Akorn's FDA-regulated manufacturing facilities that the company had concealed. Even then, Laster's opinion reads as an extraordinary case: he treated the MAE as a backstop, not a walkaway right, and emphasized that the decline had to be both severe and durationally significant.

Compare Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008), decided in the teeth of the 2008 financial crisis. Then-Vice Chancellor Lamb held that Huntsman's earnings collapse did not trigger an MAE because Hexion had not shown a durationally-significant decline in earnings power; he ordered Hexion to use reasonable best efforts to close. Every Delaware MAE opinion since Hexion has been read as an instruction manual for drafters: define the carve-outs tightly, define "disproportionately" tightly, and expect that if you are a buyer, you are going to close.

For a founder, the lesson is direct. When your future acquirer signs with you, the MAE clause in the agreement is the buyer's remorse button, and Delaware case law has nearly disabled it. Which means the rest of the contract (representations and warranties, interim covenants, closing conditions) is where the real risk sits.

Specific performance and the reverse termination fee

Twitter's agreement contains a specific-performance clause that, on its face, allows Twitter to sue to force the buyer to close. Delaware enforces specific performance in merger agreements routinely, provided the contract language is clear and the equity financing is available. The leading recent example is Channel Medsystems, Inc. v. Boston Scientific Corp., 2019 WL 6896462 (Del. Ch. Dec. 18, 2019), where Vice Chancellor Slights ordered Boston Scientific to close its acquisition of Channel Medsystems.

What makes the Twitter agreement interesting is the way specific performance interacts with the financing structure. The buyer's equity commitment letter backs a portion of the purchase price; the rest is debt. If the debt financing fails, the contract contemplates a reverse termination fee of $1 billion, payable by the buyer to Twitter, as the exclusive remedy in certain fail-to-close scenarios. Specific performance remains available to Twitter in scenarios where the equity financing is funded, because at that point the deal is fundable and the buyer simply has to close.

The $1 billion fee is not, as a matter of Delaware contract doctrine, a ceiling on damages. It is a negotiated price for specific categories of breach. A buyer who repudiates the agreement outside those categories may face both specific performance and damages. That distinction, buried in the remedies section, is where sophisticated deal lawyers live.

Interim operating covenants and the obligation to close

Between signing and closing, a target is bound by interim operating covenants (to run the business in the ordinary course, not to take extraordinary actions without buyer consent) and the buyer is bound by financing and cooperation covenants. The Twitter agreement contains standard versions of both.

One covenant worth reading twice is the buyer's obligation to use reasonable best efforts to obtain the debt financing and to close. The Delaware Supreme Court in Hexion, affirming Chancery, treated "reasonable best efforts" as a meaningful obligation. A buyer who loses interest in the deal, stops returning the lenders' calls, or picks a fight over diligence items that it could have raised at signing is in breach. That is the playbook Hexion foreclosed, and every Chancery opinion since has reinforced.

For a founder who may one day sell, that is the part of the case law that matters. The MAE clause is almost never the exit door. The interim covenants, the efforts standard, and the specific-performance remedy are the cage.

What founders should take from this before they raise

Three things, concretely.

First, your company's charter and stockholders' agreement will eventually feed into a merger agreement like this one. If you are incorporating in Delaware (and if you are raising institutional capital you will be, because investors require it), treat the DGCL as the operating manual for your exit. The machinery in § 251 is the machinery a buyer will use. The fiduciary doctrines the Chancery applies to your board in that transaction are the doctrines you are signing up for now.

Second, understand that the Delaware deal-terms vocabulary has meaning. MAE is not "whatever goes wrong." Specific performance is not a threat; it is a remedy courts routinely grant. A reverse termination fee is not a walkaway option; it is a liquidated price for a specific kind of breach. When your investors' lawyers negotiate a term sheet, they are negotiating against this body of law, and so should yours.

Third, the reason Delaware commands the premium it commands, the reason your Series A lead will insist on Delaware over your home state, is sitting in the Twitter merger agreement in plain text: governing law Delaware, forum Court of Chancery. That choice buys predictable enforcement of the terms above. It is worth the $300 annual tax and the registered-agent fee several times over, but only if you understand what you are buying. (For the mechanics of getting a Delaware entity on the books, see the 2016 Delaware formation guide.)

The Twitter deal may close on time, may close late, may close after a fight, or may not close at all. Whichever outcome prevails, the agreement itself will be read by every M&A associate in the country this summer as a primer. A founder who reads it the same way, before they ever sign a term sheet, will negotiate the next one better.

Sources

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