Now that Elon Musk has signaled his intention to back out of his $44 billion bid to buy Twitter, the fate of the influential social media network will be determined by what may be an epic court battle, involving months of costly litigation and high-risk negotiations. by elite lawyers on both sides.
The question is whether Musk will be legally forced to stick to the agreed-upon acquisition or be allowed to walk away, possibly by paying a 10-figure fine.
Most legal experts say Twitter has the upper hand, in part because Musk placed few conditions on his deal to buy the company, and the company is determined to force the deal.
But Musk revels in impulsiveness and brinkmanship and is backed by a fleet of top bankers and lawyers. Rather than engage in a protracted public feud with the world’s richest man and his legions of die-hard followers, Twitter could come under pressure to find a quick and relatively peaceful solution, one that could preserve the company’s independence but leave it in a tenuous position. financial situation. position.
Mike Ringler, a partner at Skadden, Arps, Slate, Meagher & Flom who represents Musk, reported on Twitter late Friday that his client was abandoning the acquisition. Ringler argued in his letter that Twitter had violated the agreement with Musk by failing to provide detailed information about how it measures inauthentic accounts. He also said that Musk did not believe the metrics that Twitter has publicly revealed about how many of its users were fake.
Twitter’s board responded by saying it intended to consummate the acquisition and would sue Musk in Delaware chancery court to force him to do so.
At the heart of the dispute are the terms of the merger deal that Musk reached with Twitter in April. His contract with Twitter allows him to terminate it for a $1 billion fee, but only under specific circumstances, such as losing debt financing. The deal also requires Twitter to provide any data Musk may need to complete the transaction.
Mr. Musk has demanded that Twitter provide a detailed report of spam on its platform. Throughout June, lawyers for Musk and Twitter argued over how much data to share to satisfy Musk’s queries.
Musk’s cold feet over the Twitter deal coincided with a big drop in the valuation of tech companies, including Tesla, the electric vehicle company he runs, which is also his main source of wealth. Musk did not respond to a request for comment.
Twitter maintains that its spam numbers are accurate, but has refused to publicly detail how it detects and counts spam accounts because it uses private information, such as users’ phone numbers and other digital clues about their identities, to determine whether a spam account is spammy. account is not authentic. A Twitter spokesman declined to comment on when he planned to sue Twitter to enforce the merger agreement.
“The results are: the court says Musk can go,” said David Larcker, a professor of accounting and corporate governance at Stanford University. “Another result is that he is forced to go through with the deal, and the court can enforce this. Or there could be some middle ground where there is a price renegotiation.”
For Twitter, completing a sale to Mr. Musk is vital. He struck his deal with Musk when tech companies were enjoying buoyant valuations; some, like Snap and Meta, have now slumped in the face of advertising pressure, global economic turmoil and rising inflation. Twitter shares have fallen 30 percent since the deal was announced, and are trading well below Musk’s offer price of $54.20 a share.
Legal experts said Musk’s spat dispute could be a ploy to force Twitter back to the negotiating table in hopes of getting a lower price.
During the negotiation, no other potential buyers emerged as a white knight alternative to Mr. Musk, so his offer is the best Twitter is likely to get.
Twitter’s trump card is a “specific performance clause” that gives the company the right to sue Musk and force him to complete or pay the deal, as long as the debt financing he has cornered remains intact. Forced takeovers have happened before: In 2001, Tyson Foods tried to back out of a takeover of meatpacker IBP, pointing to IBP’s financial problems and accounting irregularities. A Delaware court deputy chancellor ruled that Tyson had to 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 more uncertainty to already nervous employees.
Dealing disagreements have often ended in price agreements or renegotiations. In 2020, luxury giant LVMH Moët Hennessy Louis Vuitton attempted to break its $16 billion deal to acquire Tiffany & Company, ultimately getting a discount of around $420 million.
“This 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 money.”
A lower price would benefit Musk and his financial backers, especially as Twitter faces financial difficulties. But Twitter has made it clear that it wants to force Musk to stick to its $44 billion offer.
The most damaging outcome for Twitter would be for the deal to collapse. Musk would have to prove 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 necessary to close the deal. He has also argued that Twitter misreported its spam numbers and that the misleading statistics hid a serious problem with Twitter’s business.
A buyer successfully argued only once in a Delaware court that a material change in the target company’s business gives it the ability to cleanly exit the deal. That came in 2017 in the $3.7 billion acquisition of pharmaceutical company Akorn by healthcare company Fresenius Kabi. After Fresenius signed the deal, Akorn’s profits plummeted and he faced accusations from a whistleblower of circumventing regulatory requirements.
Even if Twitter proves it did not violate the merger agreement, a chancellor in Delaware court can still allow Musk to pay damages and walk away, as in the case of the Apollo Global Management deal that combined Huntsman and Hexion chemistry in 2008. (The lawsuits concluded in a deal breaker and a $1 billion settlement.)
Forcing an acquirer to buy a company is a complicated process to oversee, and a chancellor may not want to order a buyer to do something that it will ultimately renege on, a risk that is particularly acute in this deal, given Mr. Musk. habit of circumventing legal limits.
“The worst case scenario for the court is that they make an order and they don’t follow it, and they have to decide what to do about it,” said Morgan Ricks, a professor at Vanderbilt Law School.
While Musk typically relies on a small circle of confidants to run his businesses, including rocket maker SpaceX, he has hired a larger legal team to oversee the Twitter takeover. In addition to his personal attorney, Alex Spiro, he turned to attorneys at Skadden, Arps, Slate, Meagher & Flom.
Skadden is a leading corporate law firm with extensive experience defending cases in Delaware court, including LVMH’s attempt 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 manage the deal. Wilson Sonsini is Twitter’s longtime legal counsel, who built his reputation on venture capital and technology deals. Simpson Thatcher is a New York based law firm with more experience in corporate mergers and acquisitions in general.
If Twitter renegotiates its acquisition price or agrees to a breakup, it will likely face more legal trouble. Shareholders would sue under either scenario, adding to several shareholder lawsuits Twitter already faces over the acquisition. In April, financial analysts called Musk’s price a low offer and Twitter shareholders could balk if the company agrees to lower its acquisition price further.
A breakup could also bring additional legal scrutiny to Musk. The Securities and Exchange Commission revealed in May that it was examining Musk’s purchases of Twitter shares and whether he correctly disclosed his involvement and his intentions for the social media company. In 2018, the regulator obtained a $40 million settlement from Musk and Tesla on securities fraud charges for his tweet falsely claiming he had raised funds to take Tesla private.
“At the end of the day, a merger agreement is just a piece of paper. And a piece of paper can give you a lawsuit if your buyer chickens out,” said Ronald Barusch, a retired mergers and acquisitions attorney who worked for Skadden Arps before he represented Musk. “A lawsuit doesn’t get you a deal. It usually gives you a long-lasting headache. And a damaged company.”