Elon Musk, who is known for his erratic behavior, finally made it official on Friday when he stated in a regulatory filing that he no longer wants to proceed with the $44 billion acquisition of Twitter Inc. that the market had never really anticipated would occur.
Who has the strongest legal case in the current Twitter TWTR, -5.10 percent litigation is the big question.
Bret Taylor, the company’s chairman, stated that the company will pursue, possibly through a lawsuit for breach of contract. Experts told MarketWatch that any filings that seek either the full $44 billion that Musk promised to pay or, at the very least, the $1 billion breakup fee will likely be quickly reviewed by the Delaware Chancery Court. This weekend, Twitter’s attorneys are likely working on such filings.
According to Stephen Diamond, an associate professor of law at Santa Clara University School of Law, “I assume they will try to get a preliminary injunction to force Musk to close by the specific performance clause in the contract.” The reverse termination fee that the parties agreed to when they accepted Musk’s $54.20-per-share offer in April will be demanded instead, along with “barring that, they will demand $1 billion in damages.”
Following a letter the team sent to Twitter on Friday announcing Musk’s intention to terminate the agreement, experts predicted that Musk and his highly compensated legal team at Skadden Arps may also sue or countersue Twitter for breach of contract.
Carl Tobias, the Williams professor of law at the University of Richmond School of Law, said that there might also be conflicting lawsuits. Twitter might file in Delaware, whereas Musk might prefer to file in Texas, California, or another location where he thinks the odds are in his favor.
In a letter to Twitter’s chief legal officer Vijaya Gadde, Musk’s attorneys claim that Twitter has violated two provisions of the merger agreement by failing to provide information since May 9. They provided five instances of information Twitter omitted, with the calculation of “bot” and active-user accounts receiving the most attention. As this column has previously discussed, Musk made it clear that he wanted to address the issue of bots in the press release announcing the merger, indicating that he was not made aware of it after the deal was signed.
Few people actually think Musk is worried about Twitter’s spam disclosures; instead, this is an effort to persuade Twitter to accept a lower price after stocks were crushed in the first half of this year, making an already expensive deal appear even more so. Tesla Inc. TSLA, +2.54 percent, which accounts for a significant portion of Musk’s fortune, saw its share price fall amid the general market downturn, indicating that he was regretting the high price he offered for Twitter.
Musk and his lawyers continued to attack the bot issue in the letter, perhaps realizing that it is likely to fail. They assert that Twitter changed its staffing without Musk’s consent and that he is “examining the company’s recent financial performance and revised outlook, and is considering whether the company’s declining business prospects and financial outlook” could result in a way out.
These arguments—that an acquisition target has experienced a material change in its business since the merger agreement was signed—according to Diamond, a professor of business law, securities law, corporate finance, and corporate governance, are not likely to succeed in the court where the trial is likely to take place.
Delaware is very sceptical of these arguments, he said, adding that they rarely, if ever, convince people.
Musk and Twitter could reach an agreement at a lower price as a way out of this, but that is unlikely to happen before they go to court. According to Diamond, it is more likely that they come to an agreement after Twitter establishes its case.
With regard to the possibility that the court might order Musk to abide by the merger agreement, Diamond predicted that Twitter would use a performance order to close, perhaps at a slightly reduced cost.
Elon Musk no longer wants to purchase Twitter, but he may still be required to make the payment.
The Twitter board and the business would ultimately be better off without Musk. The idea of Musk taking over the business, going private, and allowing Twitter to become a platform for free speech “within the law” has never been well received by the workforce. Musk’s impending deal has already cost the company some prominent engineers.
According to Diamond, the board should never have interacted with Musk at such a high level.
I believe that Twitter’s stakeholders, such as users like myself and shareholders, have a real beef with the CEO for initially sleeping with this man, Diamond said. He is not a trustworthy business associate. Socially conscious capitalism is not it.
That may be the case, but looking back is useless at this point. In the present context, responsible capitalism requires Twitter to confront Musk in court and demand at least $1 billion or as many billions as they can extract from him. Although it would be best if Musk did not run Twitter, the company will need his funding to grow.
