Dive Brief:

• The law firm hired to manage Twitter’s lawsuit against Elon Musk last year when he was wavering on his agreement to buy the social media site outrageously enriched itself to the tune of $90 million in violation of state law and the legal profession’s code of conduct and ethics, Twitter says in a lawsuit against the law firm filed last week.
• The firm, Wachtell, Lipton, Rosen & Katz, “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,” says the complaint, filed in California Superior Court July 5 by X Corp., the Elon Musk-established legal entity that owns Twitter.
• The lawsuit seeks restitution for unjust enrichment and penalties for breach of fiduciary duties and violating California’s business and professional code of conduct. Wachtell didn’t immediately respond to a request for comment.

Dive Insight:

Twitter’s in-house legal team hired Wachtell in June last year to compel Elon Musk to go through with his acquisition of the company for $54.20 per share after he appeared to waver in the face of a broad drop in technology company values.

After committing to purchase the social media company for a premium over its $40-per-share value, Musk questioned whether Twitter was being truthful about the number of bots among its account holders. The company said it was about 5% but Musk said he believed it was closer to 20%. 

Some analysts called the concern over bots an excuse for getting out of the deal after Twitter’s value dropped to $33 a share, more than $20 lower than what Musk committed to pay.

It sounds like a “dog ate the homework” excuse for canceling the deal, Dan Ives of Wedbush Securities told The Economist at the time. 

After outreach by the law firm, Twitter’s in-house legal leadership hired Wachtell to help it manage its lawsuit against Musk.  

Within months, the law firm had racked up almost $18 million in hourly fees based on the terms of the engagement letter the two sides agreed on. 

“Wachtell submitted massive invoices to Twitter that included millions of dollars in hourly billings by Wachtell partners with completely blank time entry descriptions,” says the recent complaint. 

In October, Musk abruptly changed course and agreed to buy Twitter under the original terms of the agreement, effectively ending Wachtell’s work for the company. 

Interpreting Musk’s decision as a victory for their lawsuit, Wachtell asked Twitter’s general counsel, Sean Edgett, to modify the engagement letter to include a success fee.

“Wachtell sought something unusual,” the complaint says, “an eleventh-hour renegotiation of their fee arrangement.”

Standing on the other side of that request, the complaint says, were “lame duck Twitter executives … who anticipated they were likely to be terminated following the closing of the merger,” and thus had no incentive to look out for the company’s financial interests. 

The lame duck executives mentioned in the lawsuit are Edgett and his boss, Vijaya Gadde, the chief legal officer who oversaw the company’s controversial content-moderation policy. Musk had earlier cited that policy, which determines which content gets taken down or otherwise flagged, as one of the reasons he wanted to buy the company. 

“Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are debated,” he said when he announced his deal to acquire the company in April. 

Edgett and Gadde, along with CEO Parag Agrawal and CFO Ned Segal, were fired within minutes of Musk taking over the company, but not before Edgett worked with the outgoing board to approve the firm’s modified engagement agreement to include the success fee.

In its final bill to the company, just before the transfer of ownership, the law firm sought a total of $90 million, which included the roughly $18 million that had already been paid under two previous billing invoices, resulting in a success fee that appeared to be close to $70 million. 

Improper enrichment

In its lawsuit, Twitter calls the fee unconscionable, both for the amount but also for the way it was proposed and approved in the final days before the transition by outgoing executives and board members.

“The closing day letter agreement called for payment of an unconscionable fee and was an unconscionable agreement,” the complaint says.

Twitter’s original engagement letter with the firm said nothing about a success fee, the suit says, so the law firm improperly overreached by adding it in later even though the firm’s work with the company was already completed. 

“Wachtell … procured a success fee for past services by soliciting lame duck Twitter directors and officers to effectively pilfer cash from the company right before the merger closed,” the complaint says. “The total fee that Wachtell received was several multiples of what a reasonable fee would have been under the hourly engagement that Wachtell agreed to in the June 21 engagement letter.”

The lawsuit seeks restitution of the entire $90 million and, if not that, at least the amount above the hourly-rate total it would have received under the original engagement letter.