Thoughts and prayers to Mimi Alemayehou.
Alemayehou, like the 11 other members of the Twitter board of directors, is in the midst of the Elon Musk hostile takeover circus. It was an already stressful role that became even harder when the richest man in the world set his eyes on the company.
But Alemayehou’s position is uniquely tricky. She is also the sole member of a “Special Litigation Committee” formed late last year to investigate the decision-making of the Twitter board in its last big shareholder dust-up, the 2020 settlement with activist hedge fund Elliott Management.
As the FT has reported, a shareholder lawsuit targeting the outcome of that situation last September survived a motion to dismiss in the Delaware Court of Chancery. The plaintiff, the Orlando Police Pension Fund. alleged that the Twitter board breached its fiduciary duties in settling that fight — in part by unnecessarily selling $1bn worth of convertible bonds to the private equity firm Silver Lake.
In recent weeks — even as the Musk drama was unfolding — Alemayehou has been busy. In Delaware court the SLC has asked that an existing six-month stay to the lawsuit expiring in May be extended another four months so that its investigation may continue without distraction. However, the Florida pension plan is opposing that request and is pressing to move forward with discovery and depositions.
In describing the progress the SLC has made already in its investigation, it noted in its court papers that it has collected 44,000 documents, hoped to interview 15 witnesses and that it has already served information requests to Twitter management and directors, as well as to the likes of Goldman Sachs, Elliott, Allen & Co. and Joele Frank.
This is all very awkward. Nearly all the directors from the 2020 kerfuffle remain on Twitter’s board. Goldman Sachs, Silver Lake and Elliott are key players in the current Musk drama.
In other words, while the most sensational hostile M&A bid in recent memory is being played out extremely publicly, in the background an intriguing legal fight is very much alive and could have big consequences to the current Twitter board who will once again likely face questions about prematurely caving to a hostile party.
In March 2020 Twitter announced its settlement with Elliott, which included adding Elliott’s Jesse Cohn to the board along with Silver Lake’s Egon Durban. Silver Lake also purchased a $1bn convertible bond issued by Twitter, which was intended to help fund a $2bn share buyback plan. The deal came together in just a couple of weeks, after Elliott approached Twitter saying it was prepared to submit director nominations and might even try to oust Jack Dorsey as CEO.
According to court papers, the Orlando Police Pension Fund wonders why resolving those issues required Silver Lake stepping in, and anyway how did all this happen so quickly. The pension fund was allowed by Delaware law to make a “books-and-record” request, and in return received board materials prepared by Goldman Sachs and the communications firm Joele Frank. who were hired to defend Twitter against Elliott.
After reviewing those presentations it formed its theory: Goldman and Joele Frank had scared the daylights out of the board. Elliott was the fiercest activist investor in the world and would publicly humiliate the board members of one of the most famous companies in the world.
Thomas Curry, the pension fund’s lawyer, explained to the judge in the 2021 court hearing what he believed was the mentality of the Twitter board:
“It’s either are you going to capitulate to this or are you going to go to war? And, of course, if you go to war, you’re going to war with Elliott . . . This is, I think it’s fair to say, perhaps like the most well-resourced, most successful, and, by reputation, most aggressive activist investor in the world . . . This is going to engulf your life for at least the next couple months, and it’s going to be very intense. And your adviser is telling you, if it happens, you’re going to lose. You’re going to be the losing party in this extremely high-profile proxy contest . . . I think they at least would prefer not to be unceremoniously ousted in a high-profile proxy contest from that position and have to read about it every day in the Wall Street Journal and watch it every day on CNBC This is like, you know, if you don’t play your cards right here, you’re going to end up the losing character in like a Jim Stewart book on every — in every airport bookstore in the world.”
As for the Silver Lake convertible, the plaintiff presented evidence that it believes shows the terms were too rich:
The plaintiff’s theory on why it was a sweetheart deal is also juicy. The Goldman Sachs executive leading its Twitter team was their longtime star investment banker Gregg Lemkau. Lemkau had a long relationship with Silver Lake and its leader Egon Durban, most notably on several transactions that involved Dell. Elliott and Silver Lake have been frenemies themselves, with the former also an investor at Dell. Goldman and Lemkau had also worked with Elon Musk and Silver Lake on the ill-fated 2018 attempt to take Tesla private.
(In 2020 Lemkau departed Goldman to lead Michael Dell’s private investment firm. Dell, Lemkau and Durban all have houses near each other in Hawaii.)
Tom Curry, the plaintiff’s lawyer, again offering his theory from last year’s court hearing:
“It’s that these two guys [Lemkau and Durban] in this heated two-week period where things are being negotiated probably not as formally as they often are when you have a process that drags out over months — these two guys are friends, and so that’s who you’re relying on. So I think that the relevance here is that just underscores the fact that these directors, in agreeing to this investment agreement, they were not thinking about, okay, let’s do what we need to do to maximise value for the company.”
The Orlando Police Pension Fund has not named either Goldman Sachs or Silver Lake as defendants, but it is itching to be granted discovery and access to additional documents. Depending on what it finds, the plaintiff has indicated that Goldman could face an allegation of aiding and abetting the board’s breach of fiduciary duty, and Silver Lake one for “unjust enrichment”.
Perhaps the pension fund’s smoking gun was comments it cited from Twitter’s CFO Ned Siegel, who said at a Bank of America conference that the convertible bond proceeds were superfluous:
“We probably were a year away from announcing our first repurchase when this came up of, taking on another $1 billion that we didn’t have an immediate use for in terms of running the business.”
Of course, Goldman Sachs, Silver Lake and Elliott are all big players in the current Elon drama. Goldman again is advising the board (and it also has a longstanding relationship with Tesla). Egon Durban of Silver Lake remains on the Twitter board, and at the Elon buyout price of $54.20, the convertible bond it bought would yield a profit of more than $300mn. Jesse Cohn resigned the Elliott seat from the board last year, but Elliott still owns 1.3 per cent of Twitter and could be a financing partner for the Elon bid.
The Orlando pension’s lawsuit is a so-called “derivative” claim- the harm alleged is not direct to shareholders but rather to Twitter, the corporation. Such derivative claims are normally the province of the board to pursue. However, shareholders like the Orlando pension plan can make a claim of “demand futility” to the court, arguing that the board is too conflicted to investigate wrongdoing. If the judge agrees, shareholders can press the derivative matter themselves.
Lawyers for the Twitter board described the allegations as “speculation” and reject the idea that the directors would ever be motivated to breach their duties simply to hold on to their jobs. Moreover, they argue the Silver Lake convertible bond was heavily negotiated and the terms were in line with comparable transactions.
Vice-chancellor Travis Laster of the Delaware Court of Chancery, however, found the pension fund’s narrative compelling enough to move the case to the fact-finding phase, saying at the September court hearing:
“[I]t’s a story that makes sense. It’s a story that’s supported by contemporaneous documents. It’s a story that’s supported by objective evidence of how the board acted, both in terms of the 220 documents [Goldman Sachs and Joele Frank board materials] and also in terms of the outcome.”
All this bring us back to Mimi Alemayehou. After Laster declined to dismiss the case in September, the Twitter board created the Special Litigation Committee to investigate the plaintiff’s claims. Since she joined the board in 2021, well after the Elliott settlement, she was a natural choice.
The director defendants Jack Dorsey, Martha Lane Fox, Omid Kordestani, Patrick Pichette, David Rosenblatt, Bret Taylor and Robert Zoellick remain on the board today. Just one director defendant, Ngozi Okonjo-Iweala, is no longer on the board. But she may be a future problem for Alemayehou.
The Orlando pension fund has uncovered tweets — what else — from Alemayehou that it believes show an pre-existing favourable impression of Okonjo-Iweala, whom she is now tasked with investigating. According to the pension’s court papers, Alemayehou had in 2020 and 2021 actively campaigned for Okonjo-Iweala to be appointed Director-General of the World Trade Organization. The pension wrote in recent court papers:
“Alemayehou has a long history of being a highly-vocal public supporter of Okonjo-Iweala’s political ambitions and has co-authored materials with both Okonjo-Iweala and her son.”
The current stay expires on May 9, so expect a ruling from Laster on the extension before then.
Lawyers for the Orlando Police Pension declined to comment. Lawyers for the Twitter board declined to comment. Silver Lake declined to comment. Lawyers for the Twitter SLC and Goldman Sachs did not immediately respond to request for comment.
The central thrust of the plaintiff’s case is that a Twitter directorship is so prestigious that the board members acted improperly to save their roles. However, between this lawsuit, the current Musk fireworks and likely future litigation over the Musk takeover, it maybe does not seem so hot at all.
Complaint, Orlando Police Pension Fund v. Twitter Board of Directors
Transcript, Oral Argument and Rulings of the Court on the Defendant’s Motion to Dismiss, 9/10/21
Motion to Extend Stay by the Twitter SLC
Plaintiff’s Response in Opposition to the SLC’s Motion to Extend the Stay