Now that Elon Musk has stated his intention to step away from his $ 44 billion offer 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 Mr. Musk will be legally required to stay with his agreed-upon acquisition or will be allowed to back down, possibly paying a 10-figure penalty.
Most legal experts say Twitter has the advantage, in part because Mr. Musk tied few terms to his deal to buy the company, and the company is determined to force the deal.
But Mr. Musk delights in impulsiveness and wit and is backed by a fleet of top-notch bankers and lawyers. Instead of engaging in a protracted public fight with the world’s richest man and his legions of staunch followers, Twitter could be pressured to find a quick and relatively peaceful solution, one that could preserve the independence of the world. company but leave it in a tenuous financial situation. position.
Mike Ringler, partner of Skadden, Arps, Slate, Meagher & Flom representing Mr. Musk, reported on Twitter Friday afternoon that his client was abandoning the acquisition. Mr. Ringler argued in his letter that Twitter had violated the agreement with Mr. Musk for not providing you with detailed information on how to measure non-authentic accounts. He also said that Mr. Musk did not believe the metrics Twitter has publicly revealed about how many of its users were fake.
The Twitter board responded by saying it intended to complete the acquisition and would sue Mr. Musk in a Delaware chancellery court for forcing him to do so.
At the heart of the dispute are the terms of the merger agreement that Mr. Musk arrived on Twitter in April. His contract with Twitter allows him to break his deal by paying a $ 1 billion fee, but only in specific circumstances, such as losing debt financing. The agreement also requires Twitter to provide the data that Mr. Musk may require to complete the transaction.
Mr. Musk has demanded that Twitter give a detailed spam account to its platform. Throughout June, Mr. Musk and Twitter have discussed how much data to share to satisfy Mr. Musk’s queries. Musk.
The cold feet of Mr. Musk on the Twitter deal coincided with a sharp 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 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 identity, to determine if an account is not authentic. A Twitter spokesman declined to comment when Twitter planned to sue to enforce the merger agreement.
“The results are: the court says Musk can leave,” said David Larcker, a professor of accounting and corporate governance at Stanford University. “Another result is that he is forced to continue with the agreement, and the court can enforce it. Or there could be some middle ground where there is a price renegotiation.”
For Twitter, complete a sale to Mr. Musk is vital. He reached an agreement with Mr. Musk, as tech companies were enjoying upbeat ratings; some, like Snap and Meta, have now plummeted due to advertising pressure, the global economic upheaval and rising inflation. Twitter shares have fallen about 30 percent since the deal was announced and are trading well below the $ 54.20 per share bid price of Mr. Musk.
Legal experts said Mr. Musk on spam could be a ploy to force Twitter to return to the negotiating table in hopes of getting a lower price.
During the deal, no other potential buyers emerged as a white knight alternative to Mr. Musk, making your offer the best Twitter will likely receive.
Twitter’s letter of triumph is a “specific performance clause” that gives the company the right to sue Mr. Musk and force him to complete or pay the agreement, as long as the debt financing he has granted remains intact. Forced acquisitions have already occurred before: in 2001, Tyson Foods attempted to withdraw from an acquisition of the IBP meat packer, noting IBP’s financial problems and accounting irregularities. A vice-chancellor of the Delaware court ruled that Tyson should 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 employees who are already nervous.
Disagreements in agreements have often ended in agreements or renegotiations on the price. In 2020, luxury giant LVMH Moët Hennessy Louis Vuitton tried to break its $ 16 billion deal to acquire Tiffany & Company, and finally got a $ 420 million discount.
“These things are a bargaining power in an economic transaction,” said Charles Elson, a recently retired professor of corporate governance at the University of Delaware. “It’s all a matter of money.”
A lower price would benefit Mr. Musk and his financial sponsors, mostly because Twitter faces headwinds. But Twitter has made it clear that it wants to force Mr. Musk to fulfill its $ 44 billion offer.
The most damaging result for Twitter would be that the deal collapses. Mr. Musk should show that Twitter materially and intentionally breached the terms of his contract, a high level that buyers have rarely reached. Mr. Musk has claimed that Twitter retains the information needed to close the deal. He has also argued that Twitter misreported its spam figures and that misleading statistics hid a serious problem with the Twitter business.
A buyer has only successfully argued once before a Delaware court that a material change in the business of the target company gives him the ability to get out of the deal clearly. This happened in 2017 in the acquisition of $ 3.7 billion from the pharmaceutical company Akorn by the health company Fresenius Kabi. After Fresenius signed the agreement, Akorn’s profits fell and he faced complaints from a whistleblower excluding regulatory requirements.
Even if Twitter proves that it did not violate the merger agreement, a Delaware court chancellor can still allow Mr. Musk pays the damages and withdraws, as in the case of the Apollo Global Management agreement that combined the chemical companies Huntsman and Hexion in 2008.. (The lawsuits concluded in a broken deal and a $ 1 billion deal.)
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 ultimately fails, a risk that is particularly acute in this deal, given Mr. . Musk. custom of ignoring legal limits.
“The worst case for the court is that it makes an order and it doesn’t comply, and they have to figure out what to do about it,” said Morgan Ricks, a professor at Vanderbilt Law School.
Although Mr. Musk typically relies on a small circle of confidants to run his business, which includes rocket maker SpaceX, has incorporated a larger legal team to oversee Twitter’s acquisition. In addition to his personal attorney, Alex Spiro, he used attorneys from Skadden, Arps, Slate, Meagher and Flom.
Skadden is a leading corporate law firm, with extensive experience arguing cases in Delaware court, including LVMH’s attempt to break its Tiffany acquisition.
For its part, Twitter has deployed lawyers from two firms, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to handle the deal. Wilson Sonsini has long been Twitter’s legal advisor, building his reputation from venture capital and technology deals. Simpson Thatcher is a New York-based law firm with more experience in mergers and general corporate acquisitions.
If Twitter renegotiates its purchase price or accepts a break, it will likely face more legal issues. Shareholders would sue for either scenario, adding to several shareholder lawsuits that Twitter is already facing for the acquisition. In April, financial analysts rated the price of Mr. Musk of a low-end offer, and Twitter shareholders could turn down if the company agreed to further reduce its acquisition price.
A rupture could also bring additional legal scrutiny to Mr. Musk. The Stock and Securities and Exchange Commission revealed in May that it was examining Mr. Musk shares Twitter and whether he properly revealed his involvement and intentions for the social media company. In 2018, the regulator secured a $ 40 million settlement from Mr. Musk and Tesla for the charges that their tweet falsely claiming that funding had been secured to take Tesla in private was a securities fraud.
“At the end of the day, a merger deal is just a piece of paper. And a piece of paper can give you a lawsuit if your buyer has cold feet,” said Ronald Barusch, a retired mergers and acquisitions lawyer who worked for Skadden Arps before representing Mr. Musk. “A lawsuit does not give you any treatment. It usually causes you a prolonged headache. And a damaged company. “