Elon Musk will face an uphill battle if Twitter takes him to court over the Tesla founder’s attempt to back out of the agreed $44 billion acquisition of the platform, legal experts predict.
On Friday, Musk said Twitter had “materially violated multiple provisions” of the contracted agreement, which gave him the right to withdraw, ending weeks of speculation about the billionaire’s desire to buy the company.
Twitter retaliated, announcing plans to sue Musk in the Delaware Court of Chancery, where the company is incorporated, to force him to honor the settlement for the combined price of $54.20 per share.
Action and reaction set the stage for a costly legal battle that could plunge the company into more turmoil.
Twitter may agree to a deal or negotiate a lower price with Musk to avoid what would be hefty legal fees and more uncertainty, amid layoffs and low morale within the company.
But if the settlement is contested to the end in the courts, Musk and his legal team will face a tough challenge, according to legal experts, who suggest Twitter could have the upper hand.
“I think we’ll finally see whether Elon Musk is ‘above the law,’” said John Coffee of Columbia Law School. “I’m confident that in Delaware courts the answer is no. The law is pretty clear that you can’t get out of a deal the way he’s trying to.”
Wary buyers have often tried to argue that a company experienced a “material adverse effect” (MAE) to nullify a merger deal, citing deteriorating business results for the target company as evidence.
However, Delaware courts have ruled only once that a company could escape via MAE, leading hesitant buyers like Musk to rely on other legal arguments to avoid a deal.
Musk alleges that Twitter violated three different clauses in his contract. First, he said that Twitter had repeatedly failed to provide adequate information about fake and spam accounts necessary to enable financial planning for the transaction.
Second, Musk’s reps say they performed a preliminary assessment of what data they could access and found that the number of spam and fake accounts on the platform was “extremely higher” than the 5% measured by Twitter. Twitter’s public disclosures as part of the settlement therefore contain “materially inaccurate representations,” they said.
Ultimately, Musk argued that the departures of key Twitter employees since the deal was signed demonstrated that the company was deviating from its obligation to “conduct its business in the normal course”, another violation that could provide an escape for Musk.
Musk had been addressing the issue of fake accounts for months in interviews and in his own tweets. Twitter defended the 5% figure as accurate and agreed with some of Musk’s data demands. However, the company indicated that it cannot share the complete dataset with third parties for evaluation, as it includes confidential user information, which is protected by privacy laws.
“The requirement to provide information does not necessarily justify the refusal to close [o negócio]”, said Coffee.
More broadly, Twitter is likely to argue that Musk’s concerns simply mask buyer regret in an expensive, highly leveraged deal. Musk has received $13 billion in debt commitments from various Wall Street banks. The price of debt has become noticeably higher in recent weeks as banks have had trouble placing the loans and bonds that underpin other leveraged buyouts.
Musk also pledged to get more than $30 billion in stock. He previously announced that he had lined up some co-investors, including private equity firms such as Brookfield and Andreessen Horowitz, to ease the burden. Tesla shares are down more than 35% so far this year, and Musk himself has sold $8.5 billion worth of stock to help fund the deal.
“Musk will have to prove that these are actual violations of the agreement,” said Ann Lipton, a professor of corporate law at Tulane University. “But as his conduct thus far has clearly demonstrated that he was looking for any excuse to back out, he will start the case with a serious credibility issue.”
The terms of the deal include a $1 billion termination fee that Musk will have to pay if he is primarily responsible for the transaction’s collapse. Twitter has negotiated a so-called specific performance clause that obliges Musk to complete the deal if all other closing conditions are met.
While Delaware courts have generally been unimpressed by buyers claiming an MAE or technical violations of covenants or representations, in some cases the buyers have been successful.
For example, the Delaware Court of Chancery ruled in 2020 that the company Mirae of South Korea could terminate the acquisition of a set of luxury hotels owned by Anbang of China, because after signing the agreement the seller had not operated. the company in a manner consistent with past practice.
Even if Twitter wins in court, the judge could refuse to force a settlement, experts note.
“It’s very challenging to order specific behavior in a situation like this. There is external funding that needs to be done to make it work. What if Musk breaks the order? zero?” wrote Vanderbilt University law professor Morgan Ricks on Twitter.
A court battle between Musk and Twitter could be lengthy, because the process would have to delve into the details of Twitter’s business and the company’s actions after the signing. Instead, the parties could opt for a court settlement to avoid an expensive and potentially embarrassing trial.
In June, software firm Anaplan agreed to reduce its sale price to Thoma Bravo by $400 million in an $11 billion settlement, after the private equity firm said Anaplan violated the merger agreement by pay $32 million more in employee bonuses than had been disclosed in the merger agreement.
Anaplan insisted in securities filings that it did not believe the excess bonuses constituted a violation, but to avoid a legal fight it agreed to accept a lower price.
If Musk and Twitter agree to an indemnity payment rather than a revised price, the merger agreement caps that amount at $1 billion. However, the sides could simply agree on a higher number to cease hostilities.
If the conflict does come to court, Musk’s testimony could be the highlight.
In 2021, he dramatically fought a lawyer representing Tesla shareholders who accused him of improperly bailing out SolarCity, another Musk company that Tesla had acquired in 2017.
“I think you’re a bad human being,” Musk told the lawyer who questioned him. The Delaware court cleared him of any wrongdoing in that purchase.
*Collaborated with Richard Waters in San Francisco and Antoine Gara in New York
Translated by Luiz Roberto M. Gonçalves
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
