Twitter’s most beleaguered board member

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Thoughts and prayers to Mimi Alemayehou.

Alemayehou, like the other 11 members of Twitter’s board, is in the midst of Elon Musk’s hostile circus. It was an already stressful role that became even more difficult when the richest man in the world set his eyes on the business.

But Alemayehou’s position is particularly delicate. She is also the sole member of a “special litigation committee” formed late last year to investigate Twitter’s board decision-making in its latest major shareholder snag, the settlement of 2020 with activist hedge fund Elliott Management.

As the FT reported, a shareholder lawsuit seeking the outcome of this situation last September survived a motion to dismiss in the Delaware Court of Chancery. Plaintiff, the Orlando Police Pension Fund. alleged that Twitter’s board breached its fiduciary duties in settling this fight – in part unnecessarily sell for $1 billion convertible bonds to private equity firm Silver Lake.

For the past few weeks – even as Musk’s drama unfolded – Alemayehou has been busy. In court in Delaware, the SLC asked that a six-month stay in the trial expiring in May be extended for another four months so that its investigation could continue without distraction. However, the Florida Pension Plan opposes this request and is pushing to move forward with the discovery and depositions.

In describing the progress the SLC has already made in its investigation, it noted in its court papers that it had collected 44,000 documents, hoped to interview 15 witnesses, and had already made requests for information from management and Twitter directors, as well as the likes of Goldman Sachs, Elliott, Allen & Co. and Joele Frank.

It’s all very annoying. Almost all of the 2020 kerfuffle directors remain on Twitter’s board. Goldman Sachs, Silver Lake and Elliott are key players in Musk’s current 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 battle is alive and well and could have big consequences for the board. Twitter’s current administration who will likely again face questions about prematurely caving in to a hostile party.

In March 2020, Twitter announced its settlement with Elliott, which included the addition of Jesse Cohn of Elliott to the board along with Egon Durban of Silver Lake. Silver Lake also purchased a $1 billion convertible bond issued by Twitter to fund a $2 billion share buyback plan. The deal was completed in just weeks, after Elliott approached Twitter saying it was ready to submit director nominations and may even try to oust Jack Dorsey as CEO.

According to court documents, the Orlando police pension fund is questioning why resolving these issues required Silver Lake’s involvement, and anyway how did it all happen so quickly. The pension fund was authorized by Delaware law to make a request for “books and records” and in return received board documents prepared by Goldman Sachs and communications company Joele Frank. who were hired to defend Twitter against Elliott.

After reviewing these presentations, he formed his theory: Goldman and Joele Frank had scared the daylights out of the picture. Elliott was the world’s fiercest activist investor and would publicly humiliate the board members of one of the world’s most notorious companies.

Thomas Curry, the pension fund attorney, explained to the judge in the 2021 hearing what he believed to be the mentality of Twitter’s board of directors:

“It’s either will you surrender or will you go to war?” And, of course, if you go to war, you will go to war against Elliott. . . He is, I think it’s fair to say, perhaps the most resource-rich, successful and, by reputation, most aggressive activist investor in the world. . . It’s going to engulf your life for at least the next two months, and it’s going to be very intense. And your advisor tells you that if that happens, you’re going to lose. You are going to be the losing side of this highly publicized proxy fight. . . I think they would at least prefer not to be unceremoniously ousted from that position in a high-profile proxy fight and having to read about it every day in the the wall street journal and watch it every day on CNBC It’s like, you know, if you don’t play your cards right here, you’re going to end up being the losing character in a Jim Stewart book in every airport bookstore in the world.

As for the Silver Lake convertible, the plaintiff presented evidence which he claims shows that the terms were too rich:

The plaintiff’s theory as to why this 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 executive Egon Durban, including over several transactions involving Dell. Elliott and Silver Lake have themselves been enemies, with the former also being an investor in 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 left Goldman to run Michael Dell’s private investment firm. Dell, Lemkau, and Durban all have homes near each other in Hawaii.)

Tom Curry, plaintiff’s attorney, again offers his theory from last year’s hearing:

“It’s that these two guys [Lemkau and Durban] in this stormy two-week period where things are negotiated probably not as formally as they often are when you have a process that lasts for months — these two guys are friends, so that’s what you’re counting on. So I think the relevance here is that this just underscores the fact that these directors, in accepting this investment agreement, they didn’t think, okay, let’s do what we need to do to maximize value for the business.

The Orlando Police Pension Fund has not named either Goldman Sachs or Silver Lake as defendants, but is eager for discovery and access to additional documents. According to what he finds, the plaintiff has indicated that Goldman may face an allegation of aiding and abetting the board’s breach of fiduciary duty, and Silver Lake an allegation of “unjust enrichment”.

Perhaps the pension fund’s smoking gun was comments it quoted from Twitter CFO Ned Siegel, who told a Bank of America conference that convertible bond proceeds were superfluous:

“We were probably a year away from announcing our first takeover when this happened, taking an additional $1 billion that we had no immediate use for running the business.”

Of course, Goldman Sachs, Silver Lake and Elliott are all big players in the current Elon drama. Goldman is again advising the board (and he also has a long-standing relationship with Tesla). Silver Lake’s Egon Durban remains on Twitter’s board, and at Elon’s buyout price of $54.20, the convertible bond he purchased would earn over $300 million in profit. Jesse Cohn resigned from Elliott’s seat on the board last year, but Elliott still owns 1.3% of Twitter and could be a financial partner for Elon’s bid.

Orlando’s pension lawsuit is a so-called “derivative” claim – the alleged harm is not direct to shareholders but rather to Twitter, the company. Such derivative claims normally fall within the jurisdiction of the Board. However, shareholders like the Orlando Pension Plan can sue for “uselessness of the request” in court, arguing that the board is too conflicted to investigate wrongdoing. If the judge agrees, the shareholders can themselves press the derivative question.

Lawyers for Twitter’s board called the allegations “speculation” and reject the idea that directors would ever be motivated to breach their duties just to keep their jobs. Further, they argue that the Silver Lake convertible bond was heavily traded and the terms were consistent with comparable transactions.

Vice Chancellor Travis Laster of the Delaware Court of Chancery, however, found the pension fund’s account compelling enough to move the case to the investigative stage, saying at the September hearing:

“[I]It’s a story that makes sense. It is a story based on contemporary documents. It’s a story backed up by objective evidence of how the board acted, both in terms of 220 documents [Goldman Sachs and Joele Frank board materials] and also in terms of results.

This all brings us back to Mimi Alemayehou. After Laster refused to dismiss the case in September, Twitter’s board created the Special Disputes Committee to investigate the plaintiff’s allegations. Since joining the board in 2021, well after the Elliott settlement, she was a natural fit.

Defendant directors Jack Dorsey, Martha Lane Fox, Omid Kordestani, Patrick Pichette, David Rosenblatt, Bret Taylor and Robert Zoellick remain on the board today. Only one director warned, Ngozi Okonjo-Iweala, no longer sits on the board. But she could be a future problem for Alemayehou.

Orlando pension fund uncovered tweets – what else – from Alemayehou who she says show a pre-existing favorable impression of Okonjo-Iweala, whom she is now tasked with investigating. According to pension court documents, 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 documents:

“Alemayehou has long been a very active public supporter of Okonjo-Iweala’s political ambitions and has co-authored documents with Okonjo-Iweala and his son.”

The current reprieve expires on May 9, so expect a decision from Laster on the extension before then.

Orlando police pension attorneys declined to comment. Lawyers for Twitter’s board declined to comment. Silver Lake declined to comment. Attorneys for Twitter SLC and Goldman Sachs did not immediately respond to request for comment.

The thrust of the plaintiff’s case is that a position as a director of Twitter is so prestigious that board members acted improperly to salvage their roles. However, between this lawsuit, Musk’s current fireworks, and likely future litigation over Musk’s takeover, it might not seem so hot at all.

FURTHER READING:

Complaint, Orlando Police Pension Fund v. Twitter board

Transcript, Oral Argument and Court Rulings on Defendant’s Motion to Dismiss, 9/10/21

Motion for extension of stay by the Twitter SLC

Plaintiff’s Response Opposing SLC’s Motion to Extend Suspension

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