Elon Musk reported on Twitter on Friday that he was moving away from an agreed-upon takeover of $ 44 billion (£ 36.6 billion). The measure sets the stage for a legal battle between the world’s richest man and the social media platform. Here we explain what happens next and whether Musk has any chance of success.
Why is Musk leaving?
The core of Musk’s case focuses on his belief that the number of spam bot accounts on the Twitter platform far exceeds the company’s claim of less than 5% of its daily active users.
The letter from Musk’s lawyers, the shares of his electric car business, Tesla, were going to help fund the deal, argues that the under-representation of the number of spam accounts on the platform, which Twitter denies, constitutes a “material adverse effect of the company.” ”, Which effectively means that something is wrong with the business and that it is not worth close to $ 54.20 per agreed share.
How strong is Musk’s case?
The merger agreement contains a clause (6.4) stating that Twitter must provide Musk with all data and information that the billionaire requests “for any reasonable commercial purpose related to the completion of the transaction.” This is a pact of agreement: a promise to act in a certain way during the sale process, and a breach of this would allow Musk to leave without penalty.
But legal experts have questioned whether not providing more than Twitter has already shared in terms of its bot count would breach the pact. The agreement makes extensive use of the word “reasonable” when establishing which requests for information are acceptable.
“The agreement does not entitle you to receive any information, for any reason,” said Brian Quinn, an associate professor at Boston College of Law School. “He will continue with the burden of proving to the court that he had a legitimate need for the information and that his requests were reasonable. He cannot use unreasonable requests for information to create a pretext to claim a violation.”
Quinn describes the material adverse effects clause as “basically a non-initiator.” “His letter basically admits: he says they are still thinking [the alleged spam problem] out. It’s not strong and it will fail. “
Does Musk have other legal arguments?
His lawyers also argue that Twitter broke the merger deal by failing to seek Musk’s consent when it fired two executives and fired a third of its talent acquisition team (or human resources department). This may seem like a narrow basis for terminating an agreement, but the agreement states (clause 6.1) that Musk must be notified when Twitter is deviating from its obligation to do its business in the normal course and must “preserve the material components of your business substantially intact.” current business organization ”.
Quinn believes this argument has some weight and the court will examine it. But, he added, “my guess is that the court will probably decide that these layoffs look more like ordinary business than not.”
Alternatively, Musk could try to follow the funding path. The specific performance clause (9.9) requires that debt financing that underpins a substantial portion of the transaction “has been or will be financed at closing”. However, the banks ’$ 13 billion funding commitment is also covered by a legal agreement, so Twitter can be expected to consider its legal options if Musk’s banks try to withdraw.
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What are Twitter options?
Twitter president Bret Taylor said Friday that the company “would pursue legal action to enforce the merger agreement.” If it does, the case will be known in Delaware, the state of the United States that has jurisdiction over the agreement.
The Twitter Board agrees to close the transaction according to the price and terms agreed with Mr. Musk and plans to take legal action to enforce the merger agreement. We are confident that we will prevail in the Delaware Chancellery Court.
– Bret Taylor (@btaylor) July 8, 2022
Quinn said she hoped Twitter would request a declaratory ruling that did not violate the agreement and that Musk could not leave.
Experts also expect Twitter to request a court order for Musk to specifically fulfill its obligations under the agreement, that is, to buy the company. This is known as “specific action”.
John Coffee, a law professor at Columbia University, said: “They will sue the Delaware Chancellery Court for a specific performance. That is, ask for an order forcing Musk and his affiliates to close the deal at the original price. “.
The company also has the option of asking Musk for a $ 1 billion rest rate under the deal, rather than forcing him to buy it.
Is an agreement possible?
If Twitter wins its case, it could be forcing the richest man in the world to buy a business he doesn’t want.
“Most similar disputes usually conclude with agreements that allow plaintiffs and defendants to save face,” said Carl Tobias, a Williams professor at the University of Richmond.
There’s also the possibility that if Musk finds out he still wants to own Twitter, but worries about overpaying, both parties will agree on a lower price. However, Twitter’s institutional shareholders may reject it.
“I doubt the court will rule before there is an agreement, and the day-to-day price of Twitter will give you an idea of what Musk’s share is expected to pay,” Coffee said. Twitter shares are currently trading at less than $ 37, valuing the company at $ 28 billion.