Hi there,
How juicy is the Twitter v. Wachtell Lipton story??!!
There’s simply too much to talk about to save it for Friday’s newsletter!
For those of you living under a rock, Musk is suing law firm Wachtell, Lipton, Rosen & Katz (one of the most profitable law firms in the world based on profit per equity partner) to recover $90M in legal fees that the Twitter board agreed to and paid the bulk of ($84M) in the hours before Musk took over Twitter.
Reports allege that the $90M fee accounted for 10% of Wachtell Lipton’s gross revenue for 2022. 😲
Musk’s complaint alleges that Wachtell Lipton “exploited a corporate client left unprotected by lame duck fiduciaries who had lost their motivation to act in Twitter’s best interests.”
While Elon Musk is starting to develop a reputation for not paying Twitter’s debts, that’s not the story we’re interested in.
Here are 3 questions I will try and answer in this post.
- Is this the best example you’ve ever seen of why value-based billing trumps time-based billing?
- Was Wachtell’s $90M fee fair and reasonable?
- Will Elon Musk win?
Here goes!!
Is this the best example you’ve ever seen of why value-based billing trumps time-based billing?
Is it a coincidence that the most profitable law firm in the world relies on a value or outcome-based billing model?
The complaint alleges that the time billed even at Wachtell Lipton’s generous hourly rates (which avoided Twitter’s standard 15% discount to hourly rates imposed on its other law firms) was less than one-third of the $90M fee. That’s a $60M+ premium to hourly billing in order to deliver a successful outcome.
And the previous Twitter GC and Board clearly believed that Wachtel Lipton delivered $90M in value!
So arguably a good example of value-based billing and its alignment to outcomes. And in this case, a great example for law firms.
Unless, of course, it all unravels — as Musk says it should.
Was Wachtell’s $90M fee fair and reasonable?
I’ve heard the argument that the answer to this question is also a resounding “Yes.”
Wachtell helped enforce a $44B purchase price for Twitter when its true value was probably $10-15B.
The existing Twitter board and shareholders were desperate for Musk to complete the deal. Of course they were. They were getting 3 times the true value of their shares!!
In that context, $90M is clearly fair and reasonable, right?
The answer is — that we don’t know.
Let me explain.
What if another top 10 law firm was willing to deliver the same value for $30M? What if 3 top 10 law firms offered to take on Twitter’s case and win for fixed fee proposals ranging between $25M to $30M?
My point is hopefully an obvious one.
You cannot assess whether a legal fee is fair and reasonable until you’ve tested the market by running a competitive process to assess the true market price for any given scope of work and securing any given outcome.
By all accounts, Musk’s legal position against Twitter was always as weak as diluted lemonade. Musk never stood a chance of winning. The contract docs he signed for the acquisition of Twitter were watertight.
So if a competitive process would have revealed that 3 other top 10 law firms would have committed to a total fee of (say) $30M, then $90M doesn’t look so fair and reasonable.
Or at the very least, Twitter could have assessed if the Wachtell Lipton “premium” was worth $60M. Unlikely.
Will Elon Musk win?
Now for the really juicy bit.
And before diving into it, I should qualify everything that I am about to say with this: there is more speculation in this answer than in The National Enquirer.
In ordinary circumstances, a court is unlikely to step in and overrule the commercial terms of a professional adviser that a GC and board all signed off on.
But these are no ordinary circumstances.
From what I have read in the complaint (which of course is Elon’s case at its highest), I think Elon is in with a chance.
Here’s why.
The Wachtell model is to agree with their clients on what a fair success fee is after they have delivered their services.
Don’t like what Wachtell thinks is fair and reasonable? Fine. Don’t bother instructing them again. (A nice model if your brand can sustain it, which Wachtell’s clearly can.)
It looks like the $90M fee was only proposed by Wachtell and agreed to by the Twitter board in the hours before closing (and paid 10 minutes before)!
But how do the GC and the board know whether $60M+ over and above what was time-billed was fair and reasonable?
Why isn’t a success fee of $5M or $10M for 4 months of work reasonable (in addition to the $30M or so that Wachtell had time-billed) when the case for Twitter was always a fait accompli?
Or why isn’t the undiscounted "time on the clock" sufficient if Wachtell had not taken on any risk (as Musk alleges)?
Or what if Wachtell proposed $150M or $200M and the board said yes?
We know the $90M blew the socks off one director, Martha Lane Fox, who responded in an internal email, “O My Freaking God!”
We also know that the board was signing off on spending what in essence was (by that time) someone else’s money. And I suspect, with the protection of indemnities against any pre-close liability.
In addition, we know (or can at least speculate) that the transaction was going to close even if the board had rejected outright Wachtell’s $90M fee proposal. And that Wachtell’s usual leverage (don’t bother hiring us again if you don’t agree with what we think is fair) was not in play.
(Bet the directors wish they had 3 competing law firm proposals to show that Wachtell’s $90M fee proposal was competitive 😣. Come to think about it, I bet Wachtell also wishes the directors had!)
These are certainly interesting times…
And how and when will the case end?
I’ll share my take in this Friday’s newsletter.
Cheers,
