By Sharifa Hurt
The legal rules of corporate governance are necessarily in place to discourage corporate greed and corruption. The situation in which corporate actors operate in self-interest at the cost of their shareholders’ demise is hardly an uncommon circumstance, and often has devastating outcomes. Theranos founder Elizabeth Holmes, defrauded investors out of billions of dollars when she falsely claimed to invent technology that could diagnose disease with just a few drops of blood. Holmes’ greed not only robbed investors of billions of dollars, but it also put countless lives at risk. Sam Bankman-Fried orchestrated what prosecutors allege is one of the largest financial frauds in US history, when he misused customer funds from his cryptocurrency exchange company, FTX, to keep another one of his business ventures afloat and donate to political campaigns to influence policy. Bankman-Fried’s conduct frauded investors out of billions and FTX’s bankruptcy proved to be integral to the collapse of the crypto market. These situations and their devastating consequences make clear the need to implement safeguards ensuring shareholder interests are being adequately considered. But what happens when ensuring the highest payout for shareholders has large scale social and ethical implications?
II. The Revlon Rule
The key actors in a corporation are typically its shareholders, management, and the board of directors. Shareholders are the investors who buy the corporation’s stock and receive economic benefits in return. The management role is led by the CEO, and is responsible for setting, managing, and executing the strategies of the company. Management is essentially responsible for running the operations of the company under the oversight of the board of directors. The board of directors oversee the company’s management and business strategies, which is typically focused on long-term value creation. Thus, their aim is typically centered on strategies that insure the corporation retains value over a long period of time. However, discussions surrounding an acquisition of Revlon Inc. resulted in a legal rule that requires the board to redirect this focus on long-term value creation in the event of an imminent hostile takeover.
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) determined that if the breakup of a corporation is inevitable, the board of directors must make a reasonable effort to obtain the highest value for its sale. The board’s duty is no longer to maintain the company as a viable corporate entity, or to insure long-term value creation, but instead, has to maximize the value to shareholders when the company is sold. In other words, this legal rule means that, where a hostile takeover is imminent, the board is required to prioritize the need to obtain the best price available to shareholders.
III. Elon Musk Sets Sights on Twitter
On April 05, 2022 Elon Musk purchased more than 9% of Twitter’s shares. Shortly afterward, Musk made an offer to buy Twitter for $54.20 a share, for a total sale price of about $44 billion. At the time of his offer, $44 billion was well above Twitter’s stock price. Musk claimed that his motivation for the offer was to restore free speech principles. He had been very vocal about his disapproval of Twitter blocking certain public figures following controversial and divisive tweets, likening the action to censorship.  Almost immediately after the takeover, Musk reactivated popular artist Kanye West’s Twitter account, which had been blocked following an antisemitic tweet.
Accordingly, in adherence to the Revlon Rule, in the face of an imminent hostile takeover, and considering that Musk’s offer far exceeded Twitter’s actual value at the time, Twitter accepted Musk’s offer on April 25. Following the acceptance, Twitter’s Independent Board Chair Bret Taylor announced that “The Twitter Board conducted a thoughtful and comprehensive process to assess Elon’s proposal with a deliberate focus on value, certainty, and financing…the proposed transaction will deliver a substantial cash premium, and [the board] believe[s] it is the best path forward for Twitter’s stockholders.”
Just a few weeks after Twitter accepted Musk’s offer, on May 13, Musk announced that the deal was on hold pending further investigation into the volume of fake and spam accounts on the platform. Twitter responded by insisting that Musk already agreed to the $54.20 per share offer price and that it intended to close on and enforce the merger agreement. Consequently, Musk accused Twitter of dishonesty regarding the volume of bot and spam accounts on the site and failing to respond to requests for information about this issue. Twitter disputed these allegations and sued Musk in Delaware court to enforce the $44 billion deal. Musk countersued Twitter on allegations of fraud, arguing that he shouldn’t be bound to the agreement. Musk’s position is that he shouldn’t be bound to the agreement because Twitter failed to disclose the amount of spam accounts and data security concerns/potential breaches, deeming the agreement a fraud. A trial on the matter is set for October 17th, [add year]. Amidst this public dispute, Twitter’s valuation fell to record lows. On July 11, Twitter stock was trading about 40% below the $54.20 a share price, at which Musk originally agreed to buy the company in April. As the trial was approaching, Musk offered to resubmit his bid to acquire the company for $54.20 a share if Twitter agrees to drop the lawsuit. As Musk’s offer far exceeds any offer they could reasonably get elsewhere, and Twitter’s board is bound to maximizing shareholder profits, Twitter drops the lawsuit and Musk officially acquires Twitter on October 28. Musk immediately begins firing key executives, including CEO Parag Agrawal and policy director Vijaya Gadde.
IV. Chaos Ensues
Just hours after completing the takeover, Musk gathered several human-resource executives in a meeting and told them that Twitter’s work force needed to be cut immediately.  In the weeks following the meeting, Musk proceeded to fire 50 percent of the company’s 7,500 employees.At the same time, far-right leaning political figures began launching a slew of anti-LGTBQ tweets, testing the change in free speech boundaries since the takeover. In response and in fear of how Musk’s controversial vision for content moderation will impact the platform, top advertisers begin leaving Twitter.
Today, it has become increasingly clear how Twitter’s legacy has taken a bleak turn from the very popular and successful social media platform that it once was. By the start of 2023, more than 500 of Twitter’s top advertisers paused spending since the takeover in October.  Twitter generates about 90% of its revenue through advertising. By January 17, 2023, daily advertising revenue was 40% lower than at the same time the year prior. Around the time that the layoffs began, Musk revealed to employees in a meeting that “there’s a massive negative cash flow, and bankruptcy is not out of the question.” Musk took on $13 billion in debt to finance the $44 billion takeover, and he is currently facing difficulty in figuring out the path to repayment as interest payments are soon to become due.
V. How Did This Happen?
Before completion of the sale, Musk accused and sued Twitter for fraud. His fraud allegations and controversial plans for content moderation caused stocked prices to drop to record lows. By May of 2022, Musk’s controversy caused Twitter’s stock to fall more than 12% since he first announced his bid in April. Musk publicly spoke very negatively of the platform and was very vocal about his desire to cancel the transaction. So, why would Twitter’s board of directors proceed to go through with, and take Musk to court to enforce the completion of the sale? The Revlon Rule effectively obligates the board to proceed with the sale.
The Revlon Rule is intended to be an ethical rule aimed at curtailing the board’s ability to make self-interested decisions in the event of an imminent hostile takeover. Hostile takeovers commonly result in a majority of the directors losing their jobs. Resultantly, directors are generally opposed to a hostile takeover and seek friendlier takeover terms, attempting to secure an offer that might afford them more job security. This practice, however, is prone to be in conflict with the board’s fiduciary duty of securing the highest value for their shareholders. Thus, in an effort to save their jobs, the directors might reject an offer with high returns on the stock investment in favor of a lower offer which promises them a secure job package. Accordingly, the Revlon Rule was implemented with the intent to protect shareholder interests, and set a legal precedent for where a director’s fiduciary duty lies in such situations. However, as demonstrated by the aftermath of the Twitter takeover, this rule that was intended to promote ethical decision making can sometimes lead to very unethical outcomes.
When Musk proposed the $54.20 a share offer, the board knew that the offer was far above its current valuation and far exceeded any other offer they would likely receive elsewhere. At the time that Musk made his initial offer, Twitter shares were trading at $45.08 a share. Consequently, in adherence to the Revlon Rule, the board of directors had a fiduciary duty to maximize the stock price for their shareholders. Because a hostile takeover was imminent and accepting Musk’s offer would guarantee the highest sale price for their shareholders, the board was obligated to accept his $44 billion offer.
VI. Ethical Implications
Although the Twitter Takeover happened as the result of an ethically intended rule of corporate governance, the transaction spurred a chain of unethical outcomes. Less than a week after the transaction was complete, Musk proceeded to lay off half his workforce via mass email. He provided very sparse reasoning for the layoffs in an email, claiming that while Twitter recognizes the cuts “will impact a number of individuals who have made valuable contributions to Twitter… this action is unfortunately necessary to ensure the company’s success moving forward.” Shortly after the cuts, Musk sent out a mass email to remaining employees demanding that they work “long hours at high intensity” or receive “three months of severance,” if they did not consent to the intense working conditions or support his vision for “Twitter 2.0.” Musk’s vision for Twitter 2.0 consists of longer hours for employees, more targeted advertising, and transforming the platform into the “everything app”, with the goal of implementing user payment services. Musk further ended the free lunch incentive that was formerly in place at Twitter’s corporate offices, claiming that the cut was due to low occupancy rates. However, shortly after announcing the end of the program, he issued a return-to-office ultimatum.
In addition to the massive layoffs and financial turmoil, the Twitter Takeover has seemingly put free speech on the platform at a greater threat than it was prior to the change in ownership. At the time of Musk’s initial proposal to purchase Twitter, he claimed that one of his primary motivations for buying the platform was to address purported biases against figures on the right. As such, Musk claimed that he intended to restore Twitter as a platform for free speech, and that free speech on Twitter was being stifled.Musk never supported these claims with any data or research and Twitter’s own researchers, who had exclusive access to private company data, found evidence to the contrary. Twitter’s own researchers found that the platform is biased in favor of right-leaning viewpoints and pundits.
Crucially, Musk’s vision of Twitter as an unmoderated, unmediated speech model, will likely stifle speech in the countries where most Twitters users live. Half of Twitter’s ad revenues come from the United States but over 80% of its users live outside of the United States. Most of these users live in countries that don’t have the same constitutional and legal protections for speech, as those in place in America. As such, in the interest of protecting free speech principles, it is crucial for American platforms that operate internationally to make individualized choices over content moderation.
In 2021, Twitter refused to block some accounts that the Indian government had ordered to be shut down. Indian farmers were staging mass anti-government protests in New Delhi at the time, and India’s government sought to stifle anti-government speech on social media. Fearing that submitting to the Indian government’s demands could potentially stifle free speech, Twitter refused to take down the accounts on the premise that they were “ keeping with [their] principles of defending protected speech and freedom of expression.” Under Twitter’s previous ownership, they even went as far as to file a lawsuit against the Indian government in a regional court, challenging its demands to remove 39 tweets and accounts related to the farmer protests.  Twitter’s former leadership vehemently resisted India’s state censorship demands to preserve political free speech on the platform. However, Musk has stated that he wants Twitter to follow local laws in the countries where it operates. Thus, it is unlikely that the platform’s vigorous defense of free speech principles in foreign nations will continue.
Further, the platform experienced a drastic spike in hate speech following Musk’s acquisition of Twitter.  In the 12-hour period directly following the takeover, Twitter saw nearly a 500% increase in use of the N-word. In the following week, tweets including the word “Jew” increased five times the rate it was at since before Musk’s acquisition, and tweets with the highest engagement were overly antisemitic. Since the takeover, there has also been a notable rise in misogynistic and transphobic language operating on the platform. Musk has also restored controversial, right-leaning, political figure, Donald Trump, to the platform and fired the team previously in place to monitor and censure hate speech. Thus, it appears that right-leaning people on the platform, whose viewpoints (research shows) have already been proven to be disproportionately spread in their favor, have become further empowered on Twitter following Musk’s acquisition.
In the saga that is the Twitter Takeover, ultimately, shareholders’ interests were prioritized at the expense of large scale ethical and social ramifications. Instead of solving a free speech issue (which research suggests didn’t exist, and one of Musk’s primary motivations for acquiring Twitter) Musk’s takeover seems to have only further complicated Twitter’s efforts to promote free speech, sparking a rise in hate speech. In addition, thousands of employees were suddenly thrust into unemployment in the process, while those who managed to escape layoffs are now subject to increasingly intolerable working conditions. Elon Musk’s Twitter Takeover illustrates how maximizing shareholder profits is often at odds with the best interests of the company or even of greater society at large. Thus, a legal rule obligating directors to act solely in the interest to obtain the highest payout for their shareholders, without exception, makes the circumstance of forced sales that yield unethical outcomes inevitable.
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