Now that Elon Musk has signaled that he intends to move away from his $ 44 billion offer to buy Twitter, the fate of the influential social media network will be determined by what could be an epic legal battle, involving months of expensive lawsuits and high-stakes negotiations. of elite lawyers on both sides.
The question is whether Mr. Musk will be legally forced to stick to the agreed acquisition or be allowed to withdraw, possibly by paying a 10-digit penalty.
Most legal experts say Twitter has the upper hand, in part because Mr. Musk attached some strings to the deal to buy the company, and the company is determined to force the deal through.
But Mr. Musk enjoys impulsivity and brinkmanship and is supported by a fleet of top bankers and lawyers. Instead of engaging in a protracted public battle with the world’s richest man and his legions of hard-line followers, Twitter may come under pressure to find a quick and relatively peaceful solution – one that can preserve the company’s independence but leave it in a difficult financial solution. score.
Mike Ringler, a partner in Skadden, Arps, Slate, Meagher & Flom representing Mr. Musk, informed Twitter late Friday that his client left the takeover. Ringler claimed in the letter that Twitter had broken the agreement with Musk by not giving him detailed information on how it measures unauthentic accounts. He also said that Mr. Musk did not believe the calculations that Twitter has published about how many of the users were fake.
Twitter’s board responded by saying they intended to complete the acquisition and would sue Mr. Musk in a Delaware court of law to force him to do so.
At the heart of the dispute are the terms of the merger agreement that Mr. Musk entered into with Twitter in April. His contract with Twitter allows him to break the deal by paying a $ 1 billion fee, but only in specific circumstances such as losing debt financing. The agreement also requires Twitter to provide data that Mr. Musk may require to complete the transaction.
Musk has demanded that Twitter provide a detailed account of spam on the platform. Throughout June, lawyers for Mr. Musk and Twitter have been arguing over how much data to share to satisfy Mr. Musk’s inquiries.
Mr Musk’s cold feet on the Twitter deal coincided with a sharp drop in the valuation of technology companies, including Tesla, the electric car company he runs, which is also his main source of wealth. Mr. Musk did not respond to a request for comment.
Twitter claims that the spam numbers are accurate, but has refused to disclose 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 if an account is fake. A Twitter spokesman declined to comment when Twitter planned to sue to enforce the merger agreement.
“The results are: The court says Musk can walk away,” said David Larcker, a professor of accounting and corporate governance at Stanford University. “Another result is that he is forced to review the agreement, and the court can enforce this. Or it could be a middle ground where there is a price negotiation. “
For Twitter, it is important to complete a sale to Mr. Musk. It entered into an agreement with Mr. Musk as the technology companies enjoyed optimistic valuations; Some, like Snap and Meta, have now plunged into adversity, global economic upheaval and rising inflation. Twitter’s stock has fallen around 30 percent since the deal was announced, and is trading well below Mr. Musk’s offer price of $ 54.20 per share.
Legal experts said Mr. Musk’s dispute over spam could be a ploy to force Twitter back to the negotiating table in hopes of securing a lower price.
During the signing of the agreement, no other potential buyers appeared as a white knight alternative to Mr. Musk, which made his offer the best Twitter is likely to get.
Twitter’s trump card is a “specific performance clause” that gives the company the right to sue Mr. Musk and force him to complete or pay for the deal, as long as the debt financing he has obtained remains intact. Compulsory acquisitions have taken place before: In 2001, Tyson Foods tried to withdraw from an acquisition of the meat packer IBP, pointing to IBP’s financial problems and accounting irregularities. A Delaware court attorney ruled that Tyson had to complete the acquisition,
But legal authority is different from the practical reality. A lawsuit is likely to cost millions in legal fees, take months to resolve and add further uncertainty for already nervous employees.
Disagreements in agreements have often ended in settlements or renegotiations over price. In 2020, luxury giant LVMH Moët Hennessy Louis Vuitton tried to break its $ 16 billion deal to buy Tiffany & Company, eventually securing a $ 420 million discount.
“This is a bargaining chip in a financial transaction,” said Charles Elson, a recently retired professor of business administration at the University of Delaware. “It’s about money.”
A lower price will benefit Mr. Musk and his financial backers, especially as Twitter faces financial headwinds. But Twitter has made it clear that they want to force Mr. Musk to stick to his $ 44 billion offer.
The most damaging result for Twitter would be that the deal collapsed. Musk must show that Twitter materially and intentionally violated the terms of the contract, a high bar that buyers have rarely encountered. Mr. Musk has claimed that Twitter is withholding information necessary for him to be able to terminate the agreement. He has also claimed that Twitter misreported its spam numbers, and the misleading statistics hid a serious problem with Twitter’s business.
A buyer has only once successfully claimed in a Delaware court that a significant change in the target company’s business gives it the opportunity to exit the agreement. This happened in 2017 in the acquisition of 3.7 billion dollars of the pharmaceutical company Akorn by the health company Fresenius Kabi. After Fresenius signed the agreement, Akorn’s earnings fell, and it was accused by a whistleblower of regulatory requirements.
Although Twitter shows that it did not violate the merger agreement, a Chancellor of the Delaware Court can still allow Musk to pay compensation and pass away, as in the case of the Apollo Global Management agreement that combined the chemical companies Huntsman and Hexion in 2008. broken agreement and a settlement of 1 billion dollars.)
Forcing a buyer to buy a company is a complicated process to monitor, and a chancellor may not want to order a buyer to do something that he ultimately does not follow up on, a risk that is particularly acute in this agreement, given Mr. Musk’s habit of mocking legal frameworks.
“The worst-case scenario for the court is that it gives an order and that he does not comply, and they have to figure out what to do with it,” said Morgan Ricks, a professor at Vanderbilt Law School.
While Mr. Musk usually relies on a small circle of confidants to run his business, which includes rocket maker SpaceX, he has brought in a larger legal team to monitor the Twitter acquisition. In addition to his personal lawyer, Alex Spiro, he tapped lawyers from Skadden, Arps, Slate, Meagher & Flom.
Skadden is a law firm, with good experience in litigating before the Delaware Court, including LVMH’s attempt to break the acquisition of Tiffany.
For its part, Twitter has deployed lawyers from two firms, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to administer the deal. Wilson Sonsini is Twitter’s longtime legal advisor, building its reputation on venture capital and technology deals. Simpson Thacher is a New York-based law firm with more experience in general mergers and acquisitions.
If Twitter renegotiates the acquisition price or accepts a breakup, it is likely to face more legal issues. Shareholders will sue over both scenarios, and add more shareholder lawsuits that Twitter is already facing over the acquisition. In April, financial analysts called Musk’s price a low offer, and Twitter shareholders could be shocked if the company agrees to further reduce the acquisition price.
A break-up of a cohabitation can also give Mr. Musk further legal investigation. The Securities and Exchange Commission revealed in May that it was investigating Mr. Musk’s purchases of Twitter shares and whether he disclosed his stake and intentions for social media companies. In 2018, the regulator secured a $ 40 million settlement from Mr. Musk and Tesla due to allegations that his tweet erroneously claimed that he had secured financing to take Tesla privately constituted securities fraud.
“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 gets cold feet,” said Ronald Barusch, a retired merger and acquisition lawyer who worked for Skadden Arps before representing Mr. Musk. “A lawsuit gives you no deal. It usually gives you long-lasting headaches. And an injured company.”