Billionaire Elon Musk moved on Friday to withdraw from his $ 44 billion deal to buy Twitter, citing continued disagreement over the number of spam accounts on the platform.
Although Musk may want to end his bid on Twitter, it is not as easy as just walking away, according to legal experts. Instead, Musk is likely to face a long battle with Twitter in court that could take months to resolve.
Twitter’s board is in a very difficult position, said Ann Lipton, a professor of corporate governance at Tulane Law School. “They can not just say, ‘Okay, let’s save us the pain, Elon, we’ll let you cut the price by $ 20 per share, otherwise we̵[ads1]7;ll settle, we agree to go away if you only pay the billion dollar break fee. . I mean, Twitter is just not capable of doing that. “
Doing so would risk triggering a lawsuit from Twitter shareholders, she added. Twitter shareholders have already filed lawsuits against the company and Elon Musk himself due to the chaotic agreement.
Merger deals are “very difficult to get out of”, and so far it seems that Musk has not provided sufficient evidence to support his claims that Twitter lied about the spam, Lipton said.
Meanwhile, Twitter’s chairman, Bret Taylor, has already promised that the company’s board will take legal action against Musk.
“The Twitter Board is committed to terminating the transaction on the price and terms agreed with Mr. Musk and plans to pursue legal action to enforce the merger agreement,” Taylor wrote in a tweet.
“We are confident we will win in the Delaware Court of Chancery,” Taylor added, referring to a Delaware court ruling on corporate disputes.
Musk signed a legally binding agreement in April to buy Twitter for $ 54.20 per share. The agreement states that if one of the parties breached the agreement, they would be required to pay a breach fee of $ 1 billion.
Not long after the agreement was reached, Musk began to hint that he had other thoughts about the agreement. In May, Musk said he decided to put the acquisition of Twitter “on hold” when he considered the company’s claims that about 5% of its revenue-generating daily active users (mDAUs) are spam accounts. Twitter has said it has continued to share information with Musk, including reversing the “fire hose”, the daily stream of tweets flowing through the platform.
In a letter on Friday, Musk’s lawyers accused Twitter of a “significant breach of several provisions” in the agreement and claimed that the company provided “false and misleading representations” about the spread of fake accounts on the platform.
“There is a lot of reason to doubt that [Twitter] made such misrepresentations, but let’s assume it did, there is actually no reason to cancel a merger agreement, “Lipton said in an interview.
For there to be a “significant breach” of the agreement, Musk must prove that Twitter made false statements that were so gross that they would have a long-term impact on the company’s revenue potential, Lipton said.
“He has not yet provided evidence that this is in fact the case,” she added.
Twitter seems to have the upper hand when the agreement drama goes to court, Lipton said. The merger agreement includes a “specific performance clause” that states that Twitter has the right to sue Musk for forcing him to review the agreement, as long as he still has the debt financing in place.
In the coming days, Twitter is likely to file a lawsuit in Delaware, asking the judge to rule on whether it violated the terms of the agreement, and then order Musk to “fulfill its obligations under the contract and complete the merger,” Brian Quinn said. a professor at Boston College Law School.
After that, Quinn said he expects both parties to continue arguing in court, as part of a lawsuit that could take a year to play out. “For trials, it’s fast,” he added.
Adam Sterling, CEO of the Berkeley Center for Law and Business, told CNBC that Twitter has a strong legal case while Musks is smaller.
“He (Musk) comes up with a number of legal arguments – I think everyone has questionable status,” Sterling said, pointing to Musk’s submission on Friday. “(He) first focused on robots on the platforms, but also the performance of the company, so he kind of throws all these arguments out there.”
Musk and Twitter can also come to a settlement.
Twitter may accept a minor change in the contract price of $ 54.20 per share to avoid lawsuits, Lipton said. It may not please Twitter shareholders who liked the first offer. The purchase price represents a premium of 38% at the company’s closing price of USD 39.31 on April 1, 2022, which was the last trading day before Musk revealed its ownership interest of approx. 9% in the company. Shares on Twitter closed at $ 30.04 on Friday.
It is unclear what Musk would settle for, Lipton said.
“I do not know that Musk just wants to beat a dollar or two of the price per share,” she said. “I think Musk does not want to have the deal or a pretty dramatic reprising. So I do not think the parties are close to settling right now.”
Sterling said the Delaware Chancery Court is “designed to address such issues so that it can get Musk to follow up on the agreement, but that it could complicate the process.” Twitter appears to have a very strong legal argument, but we have not seen a precedent on this scale or an opponent like Elon Musk, so there are many questions about what he wants to do. “
CNBC’s technology reporter Jennifer Elias contributed to this report.