In August 2022, Elon Musk threatened to break off his planned $44 billion takeover of the social media site Twitter, claiming that spambots and fake accounts on the platform may represent a greater share than the less than 5% of daily users that Twitter had reported publicly.
Given the merger agreement was already signed and binding on the parties, Twitter argued that the deal must go ahead as planned. Musk however requested further data on the numbers of spam accounts.
It is reported that Musk decided against undertaking a full or in-depth due diligence process before signing the merger agreement.
What is due diligence?
In the UK, it is usual practice for a buyer to complete due diligence before completing a merger or acquisition and accordingly a buyer will typically run this process before signing up to a share purchase agreement, investment agreement or business asset agreement. The scope and duration of due diligence can vary, but normally includes the buyer submitting enquiries to the seller by way of a "due diligence questionnaire." The topics of particular importance to a buyer will depend on the transaction and the target company in question but may include areas such as the financials, intellectual property and data protection, environmental, banking, customer and supplier contracts, employment/ pensions and litigation. Often seen as an essential element to a successful commercial transaction, due diligence allows the buyer to assess the value of the business and confirm all relevant facts in order to decide whether to ultimately invest in a company or purchase it or its assets.
Why is due diligence a good idea?
From a buyer or investor perspective, due diligence is important for understanding any areas of concern in respect of the target company, negotiating a price for the deal and helping with the transition period post-completion. If a seller or their representatives provide false responses to a due diligence questionnaire, this can amount to misrepresentation (see our article for an example of this).
Due diligence can also form the basis for negotiating the warranties or indemnities in the purchase agreement to further protect buyers.
Key takeaways
The headlines on the Elon Musk and Twitter dispute serve as an important reminder to buyers on the importance of a thorough due diligence process which is appropriate for the size of the transaction and the sector area.
If you require further advice on any of the issues raised in this article, please get in touch with Brodies using the contact details below.
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