Now that Elon Musk has indicated that he plans to part with his $44 billion offer to buy Twitter, the fate of the influential social media network will be determined by what could become an epic legal battle, with months of costly lawsuits and high-stakes negotiations. by elite lawyers on both sides.
The question is whether Mr. Musk will be legally obliged to abide by his agreed acquisition or be allowed to pull out, possibly by paying a 10-figure fine.
Most legal experts say Twitter has the upper hand, in part because Mr. Musk has attached few terms to his agreement to buy the company, and the company is determined to push through the deal.
But Mr. Musk likes impulsiveness and acumen and is backed by a fleet of top bankers and lawyers. Rather than engage in a lengthy public brawl with the world’s richest man and his legions of die-hard followers, Twitter could be pressured to find a quick and relatively peaceful solution — one that will reclaim independence. of the company, but it was in a weak financial position.
Mike Ringler, a partner at Skadden, Arps, Slate, Meagher & Flom who represents Mr. Musk, said on Twitter on Friday that his client is waiving the acquisition. Mr. Ringler argued in his letter that Twitter had violated its agreement with Mr. Musk by failing to provide him with detailed information about how it measures inauthentic accounts. He also said Mr Musk did not believe the statistics Twitter has made public about how many of its users were fake.
Twitter’s board responded by saying it planned to complete the acquisition and would sue Mr. Musk in a Delaware chancellery court to force him to do so.
At the heart of the dispute are the terms of the merger agreement Mr Musk reached with Twitter in April. His contract with Twitter allows him to break his deal by paying a $1 billion fee, but only under specific circumstances, such as losing debt financing. The agreement also requires Twitter to provide information Mr. Musk needs to complete the transaction.
Mr. Musk has demanded that Twitter provide a detailed account of the spam on his platform. In June, attorneys for Mr. Musk and Twitter argued over how much data they must share to answer Mr. Musk’s questions.
Mr. Musk’s cold feet over the Twitter deal have coincided with a massive 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 insists its spam numbers are accurate, but has declined to go into public detail about how it detects and counts spam accounts because it uses private information, such as users’ phone numbers and other digital clues to their identity, to determine whether an account is not. is authentic. A Twitter spokesperson declined to comment on when Twitter planned 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 outcome is that he will be forced to go through with the deal, and the court can enforce it. Or maybe there’s a middle ground where the price is renegotiated.”
For Twitter, completing a sale to Mr. Musk vital. It struck a deal with Mr. Musk as tech companies enjoyed bullish valuations; some, like Snap and Meta, have now plummeted as they deal with advertising pressure, global economic turmoil and soaring inflation. Shares of Twitter are down about 30 percent since the deal was announced, trading well below Mr. Musk’s bid price of $54.20 a 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 getting a lower price.
During the closing of the deal, no other potential buyer emerged as a white knight alternative to Mr. Musk, making 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 close or pay the deal, as long as the debt financing he has amassed remains intact. There have been forced takeovers before: in 2001, Tyson Foods attempted to pull out of an acquisition of the meat packer IBP, citing IBP’s financial difficulties and accounting irregularities. A vice chancellor of the Delaware court ruled that Tyson must 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 even more uncertainty to the already nervous employees.
Disagreements over deals have often ended in settlements or price renegotiations. In 2020, luxury giant LVMH Moët Hennessy Louis Vuitton tried to break its $16 billion deal to acquire Tiffany & Company, eventually securing a discount of about $420 million.
“This stuff is a negotiating step in an economic transaction,” said Charles Elson, a recently retired professor of corporate governance at the University of Delaware. “It’s all about money.”
A lower price would benefit Mr. Musk and his backers, especially as Twitter faces financial headwinds. But Twitter has made it clear that it wants to force Mr. Musk to stick to his $44 billion offer.
The most damaging outcome for Twitter would be for the deal to collapse. Mr. Musk would have to demonstrate that Twitter materially and intentionally violated the terms of his contract, a high bar that buyers have rarely met. Mr Musk has claimed that Twitter is withholding information needed to close the deal. He has also argued that Twitter misreported its spam numbers and that the misleading statistics concealed a serious problem with Twitter’s business.
Only once has a buyer successfully argued in a Delaware court that a material change in the target company’s operations would give him the opportunity to properly terminate the deal. That happened in 2017 with the acquisition of the pharmaceutical company Akorn for $ 3.7 billion by the healthcare company Fresenius Kabi. After Fresenius signed the deal, Akorn’s revenues plummeted and it faced whistleblower allegations of circumventing legal requirements.
Even if Twitter proves it didn’t breach the merger agreement, a chancellor in Delaware court could still allow Mr. Musk to pay damages and walk away, as in the case of Apollo Global Management’s deal involving the chemical Huntsman and Hexion were combined in 2008. (The lawsuits ended in a broken deal and a $1 billion settlement.)
Forcing a acquirer to buy a business is a complicated process to oversee, and a chancellor may not want to instruct a buyer to do something he ultimately doesn’t perform, a risk that is particularly acute in this deal. given that Mr. Musk’s habit of circumventing legal restrictions.
“The worst-case scenario for the court is that it issues an order and it doesn’t obey, and they have to figure out what to do about it,” said Morgan Ricks, a professor at Vanderbilt Law School.
While Mr. Musk usually relies on a small circle of confidants to run his businesses, including rocket maker SpaceX, he has enlisted a larger legal team to oversee the Twitter acquisition. In addition to his personal attorney, Alex Spiro, he tapped lawyers from Skadden, Arps, Slate, Meagher & Flom.
Skadden is a specialized corporate law firm with extensive experience in pleading cases in the Delaware court, including LVMH’s attempt to abort the Tiffany acquisition.
Twitter, for its part, has hired lawyers from two companies, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to manage the deal. Wilson Sonsini has been Twitter’s legal advisor for many years, building his reputation on deals in venture capital and technology. Simpson Thatcher is a New York-based law firm with more experience in general corporate mergers and acquisitions.
If Twitter renegotiates the purchase price or accepts a break, it will likely face more legal trouble. Shareholders would sue in either scenario, adding to several shareholder lawsuits Twitter is already dealing with over the acquisition. In April, financial analysts called Mr. Musk’s price a lowball offer, and Twitter shareholders could be hesitant if the company agrees to lower the acquisition price further.
A breach could also lead to additional legal investigations into Mr. Musk. The Securities and Exchange Commission revealed in May that it was investigating Mr Musk’s purchases of Twitter stock and whether he had properly disclosed his interest and intentions for the social media company. In 2018, the regulator secured a $40 million settlement from Mr. Musk and Tesla over allegations that his tweet falsely claiming he secured funding to take Tesla private amounted to securities fraud.
“Ultimately, a merger agreement is just a piece of paper. And a piece of paper can get you a lawsuit if your buyer gets cold feet,” said Ronald Barusch, a retired merger and acquisition attorney who worked for Skadden Arps before representing Mr. Musk. “A lawsuit won’t get you a deal. It generally gives you long-lasting headaches. And a damaged company.”
