Following Elon Musk’s indication that he will withdraw his $44 billion offer to purchase Twitter, the future of the significant social media platform will likely be decided by a protracted legal battle involving high-powered attorneys on both sides, months of costly litigation, and high-stakes negotiations.
It is unclear if Mr. Musk will be forced by the law to complete the agreed-upon acquisition or if he will be permitted to back out and possibly incur a ten-figure fine.
The majority of legal experts agree that Twitter has the advantage, in part because Mr. Musk placed few restrictions on his agreement to purchase the business and because Twitter is determined to make the deal happen.
But Mr. Musk enjoys acting rashly and on the verge of disaster, and he is supported by a host of top bankers and attorneys. Twitter might feel pressure to reach a quick and relatively peaceful resolution rather than get into a protracted public brawl with the world’s richest man and his hordes of devoted followers. This could preserve the company’s independence but leave it in a precarious financial position.
Mr. Musk’s attorney, Mike Ringler, a partner at Skadden, Arps, Slate, Meagher & Flom, tweeted late on Friday that his client was giving up the acquisition. In his letter, Mr. Ringler argued that by withholding specific information about how Twitter determines whether an account is authentic, Twitter had broken the terms of its agreement with Mr. Musk. Additionally, he added that Mr. Musk did not accept Twitter’s publicly available metrics regarding the proportion of fake users.
In response, Twitter’s board declared that it would sue Elon Musk in a Delaware chancery court to compel him to complete the acquisition.
The conditions of the merger agreement that Mr. Musk and Twitter reached in April are at the center of the controversy. His agreement with Twitter permits him to end the relationship by paying a $1 billion penalty, but only in certain situations, such as when he cannot obtain debt financing. The agreement also calls for Twitter to give Mr. Musk any information he might need to complete the transaction.
Mr. Musk has demanded that Twitter provide a thorough breakdown of the spam that is present on its platform. Twitter and Mr. Musk’s attorneys have been at odds over how much information to divulge in order to satiate Mr. Musk’s requests throughout June.
When Mr. Musk changed his mind about the Twitter deal, the value of technology companies—including Tesla, the electric vehicle company he leads and his primary source of income—fell sharply as well. A comment from Mr. Musk was not forthcoming.
Twitter claims that its statistics on spam are accurate, but has declined to publicly disclose how it finds and counts spam accounts because it uses confidential data, such as users’ phone numbers and other digital identifiers, to determine whether an account is fraudulent. Regarding the timing of its legal action to enforce the merger agreement, a Twitter spokesman declined to comment.
Professor of accounting and corporate governance at Stanford University David Larcker summarized the results as follows: “The court rules that Musk can leave.” “Another result is that he is compelled to complete the transaction, and the court can make this order. Or there might be a compromise where the price is renegotiated.
It’s crucial for Twitter to complete the sale to Mr. Musk. It made its agreement with Mr. Musk when technology firms were enjoying upbeat valuations; some, like Snap and Meta, have since fallen as a result of pressure from advertising, the ongoing global economic crisis, and rising inflation. Since the announcement of the deal, Twitter’s stock has dropped by about 30%, and it currently trades for considerably less than Mr. Musk’s $54.20 per share offering price.
Legal experts suggested that Mr. Musk’s dispute with Twitter over spam may be a ruse to get Twitter back to the negotiating table in an effort to get a better deal.
Since no other potential buyer or “white knight” competitor to Mr. Musk emerged during the negotiations, his offer is the best Twitter is likely to receive.
As long as the debt financing Mr. Musk has secured is still in place, Twitter has the legal right to sue Mr. Musk and require him to complete or pay for the deal. This clause is known as a “specific performance clause.” Acquisitions that were forced have occurred before: Tyson Foods attempted to withdraw from a deal to buy meatpacker IBP in 2001 by citing IBP’s financial difficulties and accounting irregularities. Tyson was ordered by a Delaware court vice chancellor to complete the acquisition.
However, legal authority differs from actuality in the real world. A lawsuit would probably cost millions in legal fees, take months to resolve, and increase the already uneasy employees’ level of uncertainty.
Deal disputes have frequently resulted in settlements or price renegotiations. Luxury behemoth LVMH Moet Hennessy Louis Vuitton attempted to scuttle its $16 billion acquisition of Tiffany & Company in 2020, but was ultimately successful in getting a $420 million discount.
Charles Elson, a former professor of corporate governance at the University of Delaware, recently retired and said, “This stuff is a bargaining move in an economic transaction.” The main focus is on money.
Since Twitter is experiencing financial difficulties, a lower price would be advantageous to Mr. Musk and his financial backers. However, Twitter has made it clear that it wants to pressure Mr. Musk to uphold his $44 billion offer.
The deal falling through would be the worst case scenario for Twitter. Mr. Musk would have to meet a high standard that most acquirers have rarely attained by proving that Twitter materially and intentionally violated the terms of its contract. According to Mr. Musk, Twitter is withholding information that he needs to close the deal. Additionally, he claimed that Twitter exaggerated its spam statistics, hiding a significant issue with the company’s operations behind false data.
Only once has a buyer successfully argued in a Delaware court that a significant change in the target company’s operations entitles it to a clean break from the agreement. This happened in 2017 when Fresenius Kabi, a healthcare company, paid $3.7 billion to acquire the pharmaceutical company Akorn. Akorn’s earnings decreased after Fresenius signed the contract, and a whistleblower accused the company of evading regulations.
A chancellor in the Delaware court may still permit Mr. Musk to pay damages and leave, as was the case with Apollo Global Management’s 2008 merger of the chemical companies Huntsman and Hexion, even if Twitter can demonstrate that it did not break the merger agreement. (The lawsuits resulted in a brokered settlement of $1 billion and a broken deal.)
A chancellor may not want to order a buyer to take action that he ultimately chooses not to take, which is a risk that is especially acute in this deal given Mr. Musk’s penchant for disobeying the law. Forcing an acquirer to buy a company is a difficult process to oversee.
According to Morgan Ricks, a professor at Vanderbilt Law School, “the worst-case scenario for the court is that it makes an order and he doesn’t comply, and they have to figure out what to do about it.”
While Mr. Musk typically manages his businesses—which include the rocket manufacturer SpaceX—with a small group of trusted advisors, he has hired a larger legal team to oversee the acquisition of Twitter. He enlisted the aid of lawyers from Skadden, Arps, Slate, Meagher & Flom in addition to his personal attorney, Alex Spiro.
With years of experience arguing cases before the Delaware court, including LVMH’s attempt to sever its acquisition of Tiffany, Skadden is a top-tier corporate law firm.
To manage the deal, Twitter has employed attorneys from the two law firms Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett. Wilson Sonsini, a law firm that made its name on venture capital and technology deals, has been Twitter’s legal counsel for a long time. A law firm with more expertise in all-around corporate mergers and acquisitions is Simpson Thacher, based in New York.
If Twitter accepts a breakup or renegotiates the price of the acquisition, it will likely encounter more legal issues. In either case, shareholders would file lawsuits, adding to the numerous shareholder lawsuits already filed against Twitter regarding the acquisition. Financial analysts referred to Mr. Musk’s asking price as a lowball offer in April, and Twitter shareholders may revolt if the company agrees to further lower the price of the acquisition.
A breakup might expose Mr. Musk to more legal vigilance. The Securities and Exchange Commission disclosed in May that it was investigating Mr. Musk’s acquisitions of Twitter stock and whether he adequately disclosed his ownership of the company and his plans for it. In response to allegations that Mr. Musk committed securities fraud in a tweet in which he falsely claimed to have secured funding to take Tesla private, the regulator obtained a $40 million settlement from Mr. Musk and Tesla in 2018.
“A merger agreement is ultimately just a piece of paper. And if your buyer changes their mind, a piece of paper can lead to a lawsuit, according to Ronald Barusch, a retired mergers and acquisitions attorney who worked for Skadden Arps before it represented Mr. Musk. “A lawsuit won’t result in a settlement. You usually get a long headache as a result. And a damaged business.
