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Elon Musk faces long legal war with Twitter as he abandons deal

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Billionaire Elon Musk on Friday moved to back out of his $44 billion deal to purchase Twitter, citing continued disagreements over the variety of spam accounts on the platform.

While Musk will probably want to end his bid for Twitter, it isn’t as easy as just walking away, in keeping with legal experts. As a substitute, Musk likely faces a protracted battle ahead with Twitter in court that would take many months to resolve. 

Twitter’s board is in a really difficult position, said Ann Lipton, a professor of corporate governance at Tulane Law School. “They can not just say, ‘Alright, let’s spare us the pain, Elon we’ll allow you to knock the worth down by $20 per share, or we’ll settle, we’ll comply with walk away for those who just pay the billion dollar break fee. I mean, Twitter is just not able to give you the chance to try this.”

Doing so would risk triggering a lawsuit by Twitter shareholders, she added. Twitter shareholders have already filed a lawsuit against the corporate and Elon Musk himself over the chaotic deal.

Merger agreements are “very hard to get out of,” and thus far, Musk appears to have provided insufficient evidence backing up his claims that Twitter lied about its spam figures, Lipton said.

Meanwhile, Twitter’s chairman, Bret Taylor, has already promised that the corporate’s board will take legal motion against Musk.

“The Twitter Board is committed to closing the transaction on the worth and terms agreed upon with Mr. Musk and plans to pursue legal motion to implement the merger agreement,” Taylor wrote in a tweet. 

“We’re confident we are going to prevail within the Delaware Court of Chancery,” Taylor added, referring to a Delaware court that settles disputes amongst businesses. 

Musk signed a legally binding agreement in April to purchase Twitter for $54.20 a share. The agreement states that if either party broke off the deal, they’d be required to pay a $1 billion breakup fee. 

Not long after the agreement was reached, Musk began to hint that he was having second thoughts concerning the deal. In May, Musk said he decided to place his acquisition of Twitter “on hold” as he assessed the corporate’s claims that about 5% of its monetizable every day lively users (mDAUs) are spam accounts. Twitter has said it has continued to share information with Musk, including turning over its “firehose,” the every day stream of tweets that flow through the platform.

In a letter on Friday, Musk’s lawyers accused Twitter of a “material breach of multiple provisions” of the deal agreement and claimed the corporate made “false and misleading representations” concerning the prevalence of faux accounts on its platform. 

“There’s plenty of reason to doubt that it [Twitter] made such misrepresentations, but let’s assume that it did, it’s actually not a reason to cancel a merger agreement,” Lipton said in an interview. 

To ensure that there to be a “material breach” of the deal agreement, Musk would need to prove that Twitter made false statements that were so egregious they’d have a protracted term impact on the corporate’s earnings potential, Lipton said. 

“He has yet to place forth evidence that that’s in reality the case,” she added. 

Twitter appears to have the upper hand because the deal drama heads to court, Lipton said. The merger agreement features a “specific performance clause,” which says Twitter has the suitable to sue Musk to force him to undergo with the deal, so long as he still has the debt financing in place.

In the approaching days, Twitter will likely file a lawsuit in Delaware and ask the judge to rule whether it violated the terms of the agreement, then order Musk to “perform his obligations under the contract and complete the merger,” said Brian Quinn, a professor at Boston College Law School. 

After that, Quinn said he expects each parties will proceed to make their arguments in court, as a part of a litigation process that would take a 12 months to play out. “For litigation, that is quick,” he added.

Adam Sterling, executive director of the Berkeley Center for Law and Business told CNBC that Twitter has a robust legal case while Musk’s is less so.

“He (Musk) makes a lot of legal arguments — I believe all of questionable standing,” Sterling said, pointing to Musk’s filing Friday. “(He) first focused on bots on the platforms but additionally performance of the corporate so, he’s type of throwing all these arguments on the market.”

Musk and Twitter could also reach a settlement.

Twitter might comply with a minor change within the deal price of $54.20 per share so as to avoid litigation, Lipton said. That won’t please Twitter shareholders who liked the primary offer. The acquisition price represents a 38% premium to the corporate’s $39.31 closing stock price on April 1, 2022, which was the last trading day before Mr. Musk disclosed his roughly 9% stake within the firm. Shares of Twitter closed at $30.04 on Friday.

It’s unclear what Musk would accept, Lipton said.

“I do not know that Musk just desires to knock one dollar or two off the worth per share,” she said. “I believe Musk desires to not have the deal or a reasonably dramatic repricing. So I do not think the parties are anywhere near settling right away.”

Sterling said that the Delaware Chancery court is “designed to handle issues like this so, it could make Musk follow through on the deal but that it could get complicated in the method. “Twitter appears to have a really strong legal argument but we have not seen a precedent at this scale or an opponent like Elon Musk so, there’s many questions on what he’ll do.”

CNBC tech reporter Jennifer Elias contributed to this report.

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