Twitter Sued Ahead of IPO – Cause for Skepticism


Part 2: Why the Twitter pre-IPO lawsuit strikes us as strange. Besides the obvious part that it was filed during an IPO roadshow as if they were angling for quick settlement.

We discussed some of the facts reported about the Twitter pre-IPO lawsuit by Precedo Capital Group and Continental Advisors here.

Twitter Bird

Questions about the claims from the first of the inevitable pre-IPO lawsuits against Twitter.

Here are the things that strike us as strange.*  We have not had direct access to the court filings, we were not party to any of the proceedings and we don’t know anyone involved.  This is our initial reaction to some of the more questionable items in the news stories after our first casual read.

The news reports do not make it clear whether or not Twitter had any kind of agreement with Precedo or Continental.  They also do not make it clear what kind of agreement, if any, they had with GSV or what kind of relationship GSV has with Twitter.

This is crucial for understanding whether:

1.  Twitter can even a proper party to be sued by Precedo and Continental, or

2.  Twitter could in any way be liable to Precedo or Continental.

Precedo and Continental then allege that Twitter blocked the sale after they found investors willing to pay $19 per share.  And, Precedo and Continental claim that Twitter never intended for the sale to go forward.

Two things here.

First, the reports suggest that they were marketing a GSV fund that would purchase the Twitter shares, not the Twitter shares directly.  It is not clear whether that $19 number relates to shares/interests/whatever in the fund or whether that is a value based on the Twitter shares.

Second, one of the worst things for a prospective offering is busted offering ahead of it.  This generally means that the market was cool to the deal.  This is something issuers and investment banks tend to try to avoid.  Furthermore, this is more concerning since the reports suggest that the troubled Facebook IPO was a source for concern, and this would further weigh against launching some kind of squirrely deal ahead of the IPO.

Recall that a similar plan hatched by Goldman Sachs to invest in Facebook on a pre-IPO basis was cancelled in an embarrassing set of circumstances for the investment bank.  Twitter had access to good advisors.  Why would they get involved in this weird deal with P&C?

In addition to $24.2 million of compensatory damages, P&C are asking for $100 million in punitive damages.

The $24.2 million amount is 10% of the proposed offering amount for the P&C deal.  It may be a bit high, but it is not out of the question in some private deals.

However, you can’t tell me that a company that reported negotiated rather low underwriting discount on its IPO, would have agreed to a 10% commission on a squirrely private deal.  It just does not add up.  Yes, we know Facebook’s underwriting discount was low, but LinkedIn, Pandora and Potbelly paid 7%, which is far more typical.

*We understand that the reporters were probably working from the complaint (or whatever the court calls the initial filing. As a result, the facts may be muddled based on the sophistication of the plaintiffs and their lawyers.

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