You may already have seen the news that Judge Charles Breyer refused to dismiss claims against Elon Musk arising out of l’affaire Twitter.  Specifically, a class of shareholders alleged that Musk’s desperate efforts to get out of the deal – including his accusation of spam and his insistence that Twitter violated its contractual obligations by refusing to provide him with information – depressed the price of Twitter stock by creating uncertainty regarding closing.  As a result, some investors were harmed by selling stock too soon.  In Pampena v. Musk, 2023 WL 8588853 (N.D. Cal. Dec. 11, 2023), Judge Breyer dismissed claims based on several of Musk’s statements, but sustained others.  He reasoned:

The May 13 tweet reads as follows: “Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users.” … Defendant represented to a reasonable investor that the Twitter deal was on hold—and would not close—until Twitter provided information supporting its bot calculations. Or, put another way, a reasonable investor could have plausibly understood that Twitter was obligated to provide Defendant with the requested information for the deal to close…. The Court finds that Defendant’s statement did give an impression materially different from the state of affairs that existed. Plaintiffs have plausibly alleged that Defendant waived due diligence as a condition to the Merger Agreement, and thus that Twitter had no obligation under the Merger Agreement to provide information supporting its bot calculations. Because Twitter did not have an obligation to provide this data to Defendant under the terms of the Merger Agreement, Defendant’s representation that Twitter did have this obligation in order for the deal to close was false.

…

Plaintiffs state the Defendant “baselessly” announced that fake and spam accounts make up at least 20% of Twitter’s users during the “All in Summit,” a tech conference in Miami. Plaintiffs argue that each of Defendant’s statements misled investors in “represent[ing] that [Defendant] had some right to data or to cancel the Merger agreement thereto, which he did not.”… Even if Defendant’s statement was literally true based on his “random sample” calculation or some other means of data analysis, the complaint plausibly alleges that the statement misled the investing public to believe that Defendant received—and was basing his statement on—bot user data from Twitter, which was not the case…. In light of Defendant’s May 13, 2022 tweet that the deal was on hold pending details that spam/fake accounts represent less than 5% of users, a reasonable investor would likely find Defendant’s access to and findings about Twitter’s data to be material to their investment decision-making. Moreover, Defendant’s statement suggested that Twitter had significantly more bot users than reported in its most recent SEC filings, a fact which would certainly be material to an investor given the nature of Twitter’s business.

….

Plaintiffs argue that Defendant’s May 17, 2022 tweet that the number of fake accounts on Twitter could be “much higher” than 20% and that the deal “cannot move forward” was false because it created the impression that Defendant was entitled to due diligence and that he had the right to terminate the merger. The tweet is composed of two parts: (1) Twitter is made up of 20% fake/spam accounts, which Defendant thinks could be higher than 20%, and (2) the deal cannot move forward until the Twitter CEO shows proof that the spam accounts are less than 5%… it is reasonable that investors would infer that Defendant, the next day, tweeted about user data because he actually received evidence from Twitter “demonstrating that Twitter’s SEC filings were false and that the number of fake accounts exceeded 5%.” For the same reason, Plaintiffs have adequately alleged that this tweet would alter the “total mix” of information available to investors, and is therefore material.

The second statement is materially false or misleading for the same reasons that the May 13, 2022 tweet is materially false or misleading. Plaintiffs plausibly allege that Defendant waived due diligence as a condition to the Merger Agreement, and thus that Twitter did not have an obligation to provide him with “proof” that spam accounts make up less than 5% of users.  In contrast, the statement that the deal “cannot move forward” until he receives “proof of <5%” fake/spam account implies that Twitter did have an obligation to provide this data to Defendant and that Defendant was able to terminate the deal absent Twitter doing so. Accordingly, the Court concludes that Plaintiffs have adequately pleaded a material misrepresentation with respect to this tweet.

Among other things, Musk alleged that the plaintiffs could not demonstrate loss causation, because the “truth” was never revealed.  Now, I mean, that doesn’t make … sense … in a depressed stock case.  The truth doesn’t have to be revealed for a depressed price case in order to show losses; the losses occur when you sell your stock too cheaply even if the truth is never revealed to the market and remains a secret.  This is not like an inflated price case, where you buy at the inflated price but so long as the price remains high, you can sell and recoup the overpayment.  But, nonetheless, Judge Breyer held that the plaintiffs sufficiently alleged a connection between the statements and their losses because:

With respect to the statements that the deal was “temporarily on hold” (the May 13, 2022 tweet) as well as the statement that the deal “cannot move forward” until Twitter showed proof of its bot-user claims (within the May 17, 2022 tweet), Plaintiffs adequately plead loss causation through corrective disclosure…. Plaintiffs have plausibly alleged that when Defendant announced that he would move forward with the deal—after a public battle with Twitter about the Merger Agreement and absent any apparent resolution around his due diligence requests—the market reasonably reacted to the “truth” that Twitter never had the obligation to provide the bot-account information to Defendant.

Now, the interesting thing here is that the claims sustained were based on Musk’s statements on May 13, 2022, May 16, 2022, and early May 17, 2022.  But the merger agreement was filed on an 8-K on April 26.  And at that point, everyone on the planet was aware of what Twitter’s obligations were and were not.  There was, you may recall, something of a public conversation about that very issue.  So it was a bit … surprising … to see Judge Breyer conclude that the truth about Twitter’s obligations was only revealed when Musk caved in Delaware. 

That said, I’ve read Musk’s briefing and he seems more devoted to claiming that Twitter did, in fact, owe additional information under the merger agreement than to claiming that any mischaracterizations were immaterial because the public could evaluate Twitter’s obligations themselves.  So.  There you go.

But here’s the fun part.

There is another putative securities class action currently pending in the Central District of California, Baker v. Twitter, that also arises out of Musk’s efforts to get out of the Twitter deal.  This case, however, alleges that Twitter committed fraud with respect to its spam counts, and that Musk’s accusations revealed the truth.  The entire predicate of the action is that Musk himself admitted Twitter’s statements were false, and Musk’s accusations were sufficiently credible to sustain a complaint, given his access to internal information.  And the court agreed!  In August, the court held that one of Musk’s accusations – that Twitter lied about removing identified spam from the mDAU – had a sufficient basis to allege fraud on the part of Twitter.  See Baker v. Twitter, 2023 WL 6932568 (C.D. Cal. Aug. 25, 2023).  The court dismissed the complaint for failure to allege loss causation, but plaintiffs are repleading.  And, of course, since Musk now owns Twitter, he’s going to be the one who has to defend against the fraud accusations if the case goes much further.

Which means, we could have parallel securities class actions, both based on Musk’s accusations that Twitter committed fraud, one claiming the accusations were false, the other claiming they were true – and Musk is (directly or indirectly) liable for damages in both.

Anyhoo, I’ll just conclude by (once again) plugging my paper on Twitter v. Musk, Every Billionaire is a Policy Failure, now forthcoming in the Virginia Law & Business Review.

Two interesting matters related to the internal affairs doctrine came up recently, and since I just wrote a whole paper on this subject, I can’t resist mentioning them here.

First, VC Laster issued an opinion in Sunder Energy v. Jackson et al,.  The question was whether certain LLC members and employees violated noncompetes included in the LLC agreement, but Laster began by railing against the trend of companies attempting to avoid the employment law of states where they do business by writing employment-related terms into entity organizational documents, and then issuing equity compensation to employees.  The companies do so apparently in hopes that the employment-related terms will then be treated as entity internal affairs matters governed by the state of organization (Delaware), rather than employment terms governed by the employee’s home state.  Sunder Energy was not the first time Laster objected to the practice; earlier, he gave a long speech on the matter in his transcript ruling in Strategic Funding Source Holdings LLC v. Kirincic, which I quoted extensively in my paper. 

Anyway, that’s not the only thing of interest in the case; it also presents an interesting cautionary tale that will work well in the classroom.  Several people formed an LLC.  They did not, however, draft an LLC agreement.  At the moment of founding, they referred to themselves as “partners,” though they agreed that two members in particular would manage the business and receive a majority of the equity, with the remainder split among the other founders, who would be employees. 

Later, the two managing members sought legal counsel for themselves and drafted a formal LLC agreement that dramatically changed the arrangement in a manner that favored themselves and limited the rights of the other members.  The other members signed the new agreement as presented to them, but the changed terms were never explained, and the managing members implied this was just a formality recommended by entity lawyers.

Laster held that when the original LLC was formed – before the agreement was drafted – the default rules for LLC organization kicked in, which meant the managing members had fiduciary duties to the minority.  By rewriting the agreement in such a self-interested fashion – and presenting it to the minority members without disclosing what it meant – they violated those duties, rendering the new agreement unenforceable.  As Laster put it:

At the very least, Nielsen and Britton had an obligation to state plainly to the Minority Members that it was time to switch out of a mindset of fiduciary reliance and into a mindset of arm’s-length bargaining. They were obligated to put the Minority Members on notice that this was a really big deal. They needed to say, in substance, that the 2019 LLC Agreement materially and adversely altered the Minority Members’ rights, that Snell & Wilmer represented Sunder and its controlling members (viz., Nielsen and Britton) and not the Minority Members, and that the Minority Members should retain their own counsel and obtain independent advice because there were major changes in the draft agreement.

Anyway, the whole situation reminded me a little of Christine Hurt’s Startup Partnerships, about the inadvertent partnerships that form before companies formally organize.  Also, for contract and restrictive covenant mavens, there’s some great stuff on how choice of law affects the restrictive covenant analysis, and very amusing language about the overbreadth of the restrictions.

Which brings us to our next internal affairs issue, regarding the complaint filed in Adrian Dominican Sisters et al. v. Mark P. Smith, in the District of Nevada.  There, several communities of Catholic nuns filed a derivative lawsuit against Smith & Wesson, arguing that the company acted in bad faith by failing to oversee Smith & Wesson’s compliance with laws regarding the marketing of its AR-15 – functionally, a Caremark/Massey claim.  And yes, I realize this is particularly well-timed given the recent shooting at UNLV, which Ben posted about earlier this week.

The lawsuit in and of itself is interesting, but what struck me is that Smith & Wesson is organized in Nevada, but, until recently, its headquarters were in Massachusetts (they just moved to Tennessee).  The plaintiffs aver that they obtained books and records before filing their lawsuit, but as I understand Nevada law, inspection rights are only available for investors with at least a 15% stake.  So, the plaintiffs sought books and records under Massachusetts law.  And the reason that’s striking is, nothing in the complaint suggests Smith & Wesson objected – in fact, it provided records – but not long ago, in Juul Labs, Inc. v. Grove, 238 A.3d 904 (Del. Ch. 2020), VC Laster held that inspection rights are an internal affairs matter.  (Which is something I also discuss in my paper).  The choice of law for inspection rights has always been a bit fuzzy; I don’t know if Smith & Wesson acceded in in this case because of prior unfavorable precedent, or for some other reason.

As for the lawsuit itself, traditionally, religious orders have focused on shareholder proposals rather than derivative lawsuits, but it’s not surprising to me that they’re branching out because – as I previously posted – Delaware is in the process of establishing some mighty broad rules about derivative lawsuits on the grounds of intentional lawbreaking by corporate boards.  Unsurprisingly, plaintiffs are alleging even unadjudicated lawbreaking as a violation of fiduciary duty, and so, a conservative plaintiff recently latched on to that precedent to challenge Starbucks’s diversity policies, and now we’re seeing liberal-side plaintiffs claim that Smith & Wesson’s marketing of the AR-15 was illegal and rendered the company vulnerable to future liability.  (I mean, these are not Delaware companies or cases, but I think the litigants are inspired by Delaware precedent).  Also, the complaint alleges that this conduct violated the Board’s ESG Committee charter, so it turns out that Smith & Wesson has an ESG Committee.

It’s tough to know what to write here today.  I was fortunate enough to be working from home when I started getting emails from the University.  This is what the first ones said:

(11:51 a.m.) University Police responding to report of shots fire in BEH evacuate to a safe area, RUN-HIDE-FIGHT.

(11:57 a.m.). University Police responding to confirmed active shooter in BEH. This is not a test.  RUN-HIDE-FIGHT.

My first thought was to wonder why they were not texting me.  Then it was to realize that if I were not getting texts, many of my colleagues might not either.  The BEH building code meant the shooter was at the Business School–just a short, short walk from the law school.  I started texting my colleagues.  At least all of them that I had numbers for.  As people checked in, I learned that my colleagues were sheltering in place as the school locked down.  I reached out to some students who I’d worked with and had numbers for to make sure they were okay.  Fortunately, the two that I connected with were not on campus.  But they very easily could have been.  Our final exams have started and students not taking exams usually hole up at the law school to study.

Yesterday seemed to drag on with my phone buzzing every few minutes with someone trying to find out if I was okay as the news spread around the globe.  Early reports coming in where chaotic and confusing.  At one point, we thought there might be two shooters.  We also heard that over twenty people had been shot.  There have been so many of these events that people now know that the early information is often unreliable.  But it’s also terrifying.

My two-year-old daughter attends a suburban pre-school here.  They locked down in response to the news about the shooting.  Other colleagues have their own children in the University daycare and preschool.  They locked down.  I can’t imagine the horror and anxiety of being forced to shelter in place in your campus office knowing a shooter was firing off rounds near you and your child in the campus daycare.

This isn’t the first time I’ve been relatively near to a mass shooting.  The 1 October shooting happened in Vegas right around when I moved to Vegas.  I lived in Orlando about a mile and a half from the Pulse nightclub shooting.  I was in downtown Charleston when the Mother Emanuel shooting happened.  I’m not unique.  There are way too many mass shootings.   

Something about this feels different though. I walk through the buildings where the shooting occurred all the time.  On any day, I could have been over there.  The faculty killed were people I might have worked with, had their lives not been ended.

Next semester, I will teach two classes.  We’ll start with a review for how to escape the building.  It’s how all my classes will start from now on. 

I’m freaked out.  My students will undoubtedly be freaked out.