Now that Elon Musk has signaled his intent to walk away from his $44 billion offer to purchase Twitter, the fate of the influential social media network will likely be determined by what could also be an epic court battle, involving months of costly litigation and high-stakes negotiations by elite lawyers on either side.
The query is whether or not Mr. Musk will likely be legally compelled to follow his agreed-upon acquisition or be allowed to back out, possibly by paying a 10-figure penalty.
Most legal experts say Twitter has the upper hand, partially because Mr. Musk attached few strings to his agreement to purchase the corporate, and the corporate is decided to force the deal through.
But Mr. Musk revels in impulsiveness and brinkmanship and is backed by a fleet of top bankers and lawyers. Moderately than engaging in a protracted public brawl with the world’s richest man and his legions of die-hard followers, Twitter might come under pressure to seek out a swift and comparatively peaceful resolution — one that might preserve the corporate’s independence but leave it in a tenuous financial position.
Mike Ringler, a partner at Skadden, Arps, Slate, Meagher & Flom who’s representing Mr. Musk, informed Twitter late on Friday that his client was abandoning the takeover. Mr. Ringler argued in his letter that Twitter had violated the agreement with Mr. Musk by not providing him with detailed details about the way it measures inauthentic accounts. He also said that Mr. Musk didn’t imagine the metrics that Twitter has publicly disclosed about how a lot of its users were fake.
Twitter’s board responded by saying it intended to consummate the acquisition and would sue Mr. Musk in a Delaware chancery court to force him to accomplish that.
At the guts of the dispute are the terms of the merger agreement that Mr. Musk reached with Twitter in April. His contract with Twitter allows him to interrupt off his deal by paying a $1 billion fee, but only under specific circumstances comparable to losing debt financing. The agreement also requires Twitter to offer data that Mr. Musk may require to finish the transaction.
Mr. Musk has demanded that Twitter give an in depth accounting of the spam on its platform. Throughout June, lawyers for Mr. Musk and Twitter have wrangled over how much data to share to satisfy Mr. Musk’s inquiries.
Mr. Musk’s cold feet in regards to the Twitter deal coincided with an enormous slide within the valuation of technology firms, including Tesla, the electrical vehicle company he runs, which can be his predominant source of wealth. Mr. Musk didn’t reply to a request for comment.
Twitter maintains that its spam figures are accurate, but has refused to publicly detail the way it detects and counts spam accounts since it uses private information, like users’ phone numbers and other digital clues about their identities, to find out whether an account is inauthentic. A Twitter spokesman declined to comment on when Twitter planned to sue to implement the merger agreement.
“The outcomes are: The court says Musk can walk away,” said David Larcker, a professor of accounting and company governance at Stanford University. “One other end result is that he’s forced to undergo with the deal, and the court can implement this. Or there is likely to be some middle ground where there’s a price renegotiation.”
For Twitter, completing a sale to Mr. Musk is important. It struck its cope with Mr. Musk as technology firms were having fun with optimistic valuations; some, like Snap and Meta, have now plummeted as they face promoting pressure, global economic upheaval and rising inflation. Twitter’s stock has fallen about 30 percent for the reason that deal was announced, and trades well under the Mr. Musk’s offering price of $54.20 a share.
Legal experts said Mr. Musk’s dispute over spam may very well be a ploy to force Twitter back to the bargaining table in hopes of securing a lower cost.
Through the deal-making, no other potential buyer emerged as a white knight alternative to Mr. Musk, making his offer one of the best that Twitter is prone to get.
Twitter’s trump card is a “specific performance clause” that provides the corporate the proper to sue Mr. Musk and force him to finish or pay for the deal, as long as the debt financing he has corralled stays intact. Forced acquisitions have happened before: In 2001, Tyson Foods tried to back out of an acquisition of the meatpacker IBP, pointing to IBP’s financial troubles and accounting irregularities. A Delaware court vice chancellor ruled that Tyson had to finish the acquisition,
But legal authority is different than practical reality. A lawsuit will probably cost hundreds of thousands in legal fees, take months to resolve and add further uncertainty to already jittery employees.
Deal disagreements have often led to settlements or renegotiations on price. In 2020, luxury giant LVMH Moët Hennessy Louis Vuitton attempted to interrupt up its $16 billion deal to amass Tiffany & Company, ultimately securing a reduction of about $420 million.
“These things is a bargaining move in an economic transaction,” said Charles Elson, a recently retired professor of corporate governance on the University of Delaware. “It’s all about money.”
A lower cost would profit Mr. Musk and his financial backers, especially as Twitter faces financial headwinds. But Twitter has made clear it desires to force Mr. Musk to stick with his $44 billion offer.
Probably the most damaging end result for Twitter could be for the deal to collapse. Mr. Musk would want to point out that Twitter materially and intentionally breached the terms of its contract, a high bar that acquirers have rarely met. Mr. Musk has claimed that Twitter is withholding information mandatory for him to shut the deal. He has also argued that Twitter misreported its spam figures, and the misleading statistics concealed a significant issue with Twitter’s business.
A buyer has just once successfully argued in a Delaware court that a fabric change within the goal company’s business gives it the power to cleanly exit the deal. That occurred in 2017 within the $3.7 billion acquisition of the pharmaceutical company Akorn by the health care company Fresenius Kabi. After Fresenius signed the agreement, Akorn’s earnings fell and it faced allegations by a whistle-blower of skirting regulatory requirements.
Even when Twitter shows that it didn’t violate the merger agreement, a chancellor within the Delaware court should allow Mr. Musk to pay damages and walk away, as within the case of Apollo Global Management’s deal combining the chemical firms Huntsman and Hexion in 2008. (The lawsuits concluded in a broken deal and a $1 billion settlement.)
Forcing an acquirer to purchase an organization is a sophisticated process to oversee, and a chancellor may not wish to order a buyer to do something that he ultimately doesn’t follow through on, a risk that is especially acute on this deal, given Mr. Musk’s habit of flouting legal confines.
“The worst-case scenario for the court is that it makes an order and that he doesn’t comply, they usually must determine what to do about it,” said Morgan Ricks, a professor at Vanderbilt Law School.
While Mr. Musk typically relies on a small circle of confidants to run his businesses, which include the rocket maker SpaceX, he has brought in a bigger legal team to supervise the Twitter acquisition. Along with his personal lawyer, Alex Spiro, he tapped attorneys from Skadden, Arps, Slate, Meagher & Flom.
Skadden is a go-to corporate law firm, with ample experience arguing cases in front of the Delaware court, including LVMH’s try and break off its acquisition of Tiffany.
On its side, Twitter has deployed lawyers from two firms, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to administer the deal. Wilson Sonsini is Twitter’s longtime legal counsel, which built its popularity on deals in enterprise capital and technology. Simpson Thatcher is a Recent York-based law firm with more experience normally corporate mergers and acquisitions.
If Twitter renegotiates its acquisition price or accepts a breakup, it is going to probably face more legal problems. Shareholders would sue over either scenario, adding to several shareholder lawsuits Twitter is already facing over the acquisition. In April, financial analysts called Mr. Musk’s price a lowball offer, and Twitter shareholders could balk if the corporate agrees to further reduce its acquisition price.
A breakup could also bring added legal scrutiny to Mr. Musk. The Securities and Exchange Commission revealed in May that it was examining Mr. Musk’s purchases of Twitter stock and whether he properly disclosed his stake and his intentions for the social media company. In 2018, the regulator secured a $40 million settlement from Mr. Musk and Tesla over charges that his tweet falsely claiming he had secured funding to take Tesla private amounted to securities fraud.
“At the top of the day, a merger agreement is just a chunk of paper. And a chunk of paper can provide you with a lawsuit in case your buyer gets cold feet,” said Ronald Barusch, a retired mergers and acquisitions lawyer who worked for Skadden Arps before it represented Mr. Musk. “A lawsuit doesn’t provide you with a deal. It generally gives you a protracted headache. And a damaged company.”