Now that Elon Musk has signaled his intention to drop his $44 billion bid to buy Twitter, the fate of the influential social media network will be determined by what could be an epic court battle, involving months of litigation. costly and high-stakes negotiations. by elite lawyers on both sides.
The question is whether Mr Musk will be legally bound to stick with his agreed acquisition or whether he will be allowed to back out, possibly paying a 10-figure fine.
Most legal experts say Twitter has the upper hand, in part because Mr. Musk attached few conditions to his deal to buy the company, and the company is determined to force the deal.
But Mr Musk revels in impulsiveness and tightrope and is backed by a fleet of top bankers and lawyers. Rather than engaging in a protracted public brawl with the world’s richest man and his legions of hardcore followers, Twitter may be under pressure to find a quick and relatively peaceful solution — one that could preserve independence. company but leave it in a precarious financial situation. position.
Mike Ringler, a partner at Skadden, Arps, Slate, Meagher & Flom who represents Mr. Musk, informed Twitter late Friday that his client was abandoning the takeover. Mr. Ringler argued in his letter that Twitter breached the agreement with Mr. Musk by not providing him with detailed information about how it measures inauthentic accounts. He also said Mr. Musk did not believe the metrics Twitter publicly disclosed about the number of its users were fake.
Twitter’s board responded by saying it intended to complete the acquisition and would sue Mr. Musk in a Delaware chancery court to force him to do so.
At the heart of the dispute are the terms of the merger deal Mr. Musk struck with Twitter in April. His contract with Twitter allows him to break his deal by paying a $1 billion fee, but only under specific circumstances such as losing debt funding. The deal also requires Twitter to provide any data Mr. Musk might need to complete the deal.
Mr Musk demanded that Twitter report in detail about spam on its platform. Throughout June, lawyers for Mr. Musk and Twitter argued over how much data to share to meet Mr. Musk’s demands.
Mr. Musk’s cold feet over the Twitter deal have coincided with a huge drop in the valuation of tech companies, including Tesla, the electric vehicle company he runs, which is also his main source of wealth. Mr. Musk did not respond to a request for comment.
Twitter maintains its spam numbers are accurate, but has declined to publicly detail how it detects and counts spam accounts because it uses private information, such as users’ phone numbers and other numerical clues about their identity. to determine if an account is inauthentic. A Twitter spokesperson declined to comment on when Twitter planned to take legal action to enforce the merger agreement.
“The results are: the court says Musk can walk away,” said David Larcker, a professor of accounting and corporate governance at Stanford University. “Another outcome is that he is obligated to make the deal, and the court can enforce it. Or there could be a middle ground where there is a price renegotiation.
For Twitter, making a sale to Mr. Musk is vital. He cut his deal with Mr Musk as tech companies benefited from upbeat valuations; some, like Snap and Meta, have now fallen in the face of advertising pressure, global economic upheaval and rising inflation. Shares of Twitter have fallen about 30% since the deal was announced and are trading well below Mr. Musk’s offer price of $54.20 per share.
Legal experts have said Mr Musk’s spam dispute could be a ploy to force Twitter back to the negotiating table in hopes of securing a lower price.
During the closing of the deal, no other potential buyers emerged as a white knight alternative to Mr. Musk, making his offer the best Twitter is likely to get.
Twitter’s trump card is a “specific performance clause” that gives the company the right to sue Mr Musk and force him to make or pay for the deal, as long as the debt financing he secured remains intact. Forced acquisitions have happened before: In 2001, Tyson Foods tried to pull out of an acquisition of meatpacker IBP, pointing to IBP’s financial problems and accounting irregularities. A Delaware court vice chancellor ruled that Tyson must complete the acquisition.
But legal authority is different from practical reality. A lawsuit will likely cost millions in legal fees, take months to resolve, and add further uncertainty to already nervous employees.
Disagreements over agreements often ended in settlements or price renegotiations. In 2020, luxury giant LVMH Moët Hennessy Louis Vuitton tried to break its $16 billion deal to acquire Tiffany & Company, ultimately getting a discount of around $420 million.
“This stuff is a bargaining move in an economic transaction,” said Charles Elson, a recently retired professor of corporate governance at the University of Delaware. “It’s all about the money.”
A lower price would benefit Mr. Musk and his backers, especially as Twitter faces financial headwinds. But Twitter has made it clear that it wants to force Mr. Musk to stick to its $44 billion offer.
The most damaging outcome for Twitter would be for the deal to fall apart. Mr. Musk would have to show that Twitter materially and intentionally breached the terms of its contract, a high bar that acquirers have rarely reached. Mr Musk claimed that Twitter was withholding information necessary for him to close the deal. He also argued that Twitter misreported its spam numbers and that the misleading statistics concealed a serious problem with Twitter’s business.
Only once has a buyer successfully argued in a Delaware court that a material change in the target company’s business gave it the ability to cleanly exit the deal. This happened in 2017 during the $3.7 billion acquisition of pharmaceutical company Akorn by healthcare company Fresenius Kabi. After Fresenius signed the deal, Akorn’s revenue plummeted and he faced whistleblower allegations of circumventing regulatory requirements.
Even if Twitter shows it didn’t violate the merger deal, a Delaware court chancellor can still allow Mr. Musk to pay damages and walk out, like the Apollo deal did. Global Management combining chemical companies Huntsman and Hexion in 2008. (The lawsuits ended in a broken agreement and a $1 billion settlement.)
Forcing an acquirer to buy a business is a complicated process to oversee, and a chancellor may not want to order a buyer to do something that they ultimately don’t follow through on, a risk that is particularly acute in this transaction, given the opinion of Mr. Musk. habit of flouting legal boundaries.
“The worst-case scenario for the court is that they make an order and they don’t comply with it, and they have to figure out what to do about it,” said Vanderbilt Law School professor Morgan Ricks.
While Mr. Musk typically relies on a small circle of confidants to run his businesses, including rocket maker SpaceX, he has brought in a larger legal team to oversee the Twitter acquisition. In addition to his personal attorney, Alex Spiro, he has retained attorneys from Skadden, Arps, Slate, Meagher & Flom.
Skadden is a go-to business law firm, with extensive litigation experience in Delaware court, including LVMH’s bid to break up its acquisition of Tiffany.
For its part, Twitter has deployed lawyers from two firms, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to handle the case. Wilson Sonsini is Twitter’s longtime legal counsel, which built its reputation on venture capital and technology deals. Simpson Thacher is a New York-based law firm with more experience in general corporate mergers and acquisitions.
If Twitter renegotiates its acquisition price or agrees to a breakup, it will likely face more legal issues. Shareholders would sue in either scenario, adding to several shareholder lawsuits Twitter is already facing over the acquisition. In April, financial analysts called Mr. Musk’s price a low bid, and Twitter shareholders may balk if the company agrees to lower its acquisition price further.
A breakup could also bring additional legal scrutiny for Mr. Musk. The Securities and Exchange Commission revealed in May that it was reviewing Mr. Musk’s Twitter stock purchases and whether he had properly disclosed his stake and 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.
“Ultimately, a merger deal is just a piece of paper. And a piece of paper can give you a lawsuit if your buyer is cold-eyed,” said Ronald Barusch, a retired mergers and acquisitions lawyer who worked for Skadden Arps before representing Mr. Musk. “A trial doesn’t get you a deal. It usually gives you a prolonged headache. And a damaged business.