Elon Musk faces an uphill battle if Twitter takes him to court over the Tesla founder’s attempt to pull out of an agreed $44 billion (€43 billion) takeover of the platform, legal experts predict.
On Friday, Musk said Twitter had been in “material breach of multiple provisions” of the deal contract, which gave him the right to walk away, putting an end to weeks of speculation over the billionaire’s desire to buy the company.
Twitter hit back, announcing plans to sue Musk in the Delaware court of chancery, where the company is incorporated, to force him to honour the deal at the agreed price of $54.20 per share.
The action and counteraction set the stage for a costly legal battle that could plunge the company into further turmoil.
“I think we are finally going to see if Elon Musk is above the law”
— John Coffee, Columbia Law School
Twitter could opt to accept a settlement or negotiate with Musk for a lower price to avoid what would be hefty legal fees and further uncertainty amid lay-offs and rock-bottom morale inside the company.
But if the deal is contested to the end in the courts, Musk and his legal team face an uphill challenge, according to legal experts, who suggest that Twitter might have an edge.
“I think we are finally going to see if Elon Musk is ‘above the law’,” said John Coffee of Columbia Law School. “I am confident that in the Delaware courts, the answer is no. The law is fairly clear that you cannot pull out from a deal in the manner he is seeking.”
Reticent buyers have historically tried to argue that a company has experienced a “material adverse effect” to void a merger agreement, citing a deterioration of the target company’s business results as proof. However, the Delaware courts have only once ruled a company could escape via material adverse effect, leaving skittish buyers like Musk to rely on other legal arguments to avoid a deal.
Musk alleges that Twitter violated three separate provisions of its deal contract. First, he said Twitter had repeatedly failed to provide adequate information about fake and spam accounts needed to facilitate financial planning for the transaction.
Second, Musk’s representatives say they carried out a preliminary assessment of what data they could access and found that the number of spam and fake accounts on the platform was “wildly higher” than the 5 per cent estimated by Twitter. Twitter’s public disclosures as part of the deal therefore contain “materially inaccurate representations”, they say.
Finally, Musk argued that departures of key Twitter employees since the deal’s signing demonstrated that Twitter was deviating from its obligation to “conduct its business in the ordinary course”, another violation that could provide an escape hatch for Musk.
Musk had for months been broaching the fake account issue in interviews and in his own tweets. Twitter has defended the 5 per cent figure as accurate and acquiesced to some of his data demands. However, the company has indicated that it cannot share the complete data set needed to make the assessment with third parties, as this includes sensitive user information protected by privacy laws.
“Because his conduct up until now so brazenly demonstrated he was looking for any excuse to back out, he’s going to start the case with a serious credibility problem”
— Ann Lipton, corporate law professor at Tulane University
“The information-supplying requirement does not necessarily justify a refusal to close [the deal],” Coffee said.
More broadly, Twitter is likely to argue that Musk’s concerns simply mask buyer’s remorse over a pricey and highly leveraged deal. Musk has received $13 billion in debt commitments from several Wall Street banks. Debt pricing has become markedly more expensive in recent weeks as banks have had trouble placing the loans and bonds that support other leveraged buyouts.
Musk has also committed to coming up with more than $30 billion in equity himself. He has previously announced that he had lined up some co-investors, including private capital firms such as Brookfield and Andreessen Horowitz to ease the burden. Shares in Tesla have crashed more than 35 per cent so far this year, and Musk has himself sold $8.5 billion worth of shares to help fund the deal.
“Musk will have to prove these are real breaches of the agreement,” said Ann Lipton, a corporate law professor at Tulane University. “But because his conduct up until now so brazenly demonstrated he was looking for any excuse to back out, he’s going to start the case with a serious credibility problem.”
The deal terms include a $1 billion termination fee that Musk would owe if he was generally responsible for the transaction collapse. Twitter negotiated a so-called specific performance clause that commits Musk to finish the deal if all other closing conditions are met.
While the Delaware courts have generally been unimpressed with buyers arguing either a material adverse effect or technical violations of covenants or representations, in a handful of instances buyers have been successful.
For example, the Delaware court of chancery ruled in 2020 that Korea’s Mirae could terminate an acquisition of a set of luxury hotels owned by China’s Anbang as the seller had not operated the business in a manner that was consistent with past practice after signing the deal.
Even if Twitter wins in court, the judge might baulk at actually forcing through a deal, experts note.
“It’s very daunting to order specific performance in a situation like this. There’s external financing that has to be made to perform. And what if Musk flouts your order? It turns into a showdown over the court’s jurisdiction and power — what happens at ground level?” Morgan Ricks, law professor at Vanderbilt, wrote on Twitter.
A courtroom battle between Musk and Twitter could prove lengthy as the proceedings would have to dive into the details of Twitter’s business and the company’s actions after signing. The sides could instead angle for a recut deal in order to avoid an expensive and potentially embarrassing trial.
In June, software company Anaplan agreed to cut its sale price to Thoma Bravo by $400 million on an $11 billion deal, after the private equity firm said Anaplan had violated the merger agreement by paying out $32 million more in recent employee bonuses than had been disclosed in the merger contract.
Anaplan insisted in securities filings that it did not believe that the excess bonuses constituted a breach but, to avoid a legal fight, agreed to take a lower price.
If Musk and Twitter were to agree to a damages payout instead of a revised price, the merger agreement caps that figure at $1 billion. However, the sides could simply agree to a bigger number to cease the hostilities.
Should the conflict reach a courtroom, Musk’s testimony could prove the highlight.
In 2021, he dramatically jousted with a lawyer who represented Tesla shareholders who had accused him of improperly bailing out SolarCity, another Musk company that Tesla had acquired in 2017.
“I think you are a bad human being,” Musk told the lawyer who quizzed him. The Delaware court cleared him of any wrongdoing in that buyout. — Copyright The Financial Times Limited 2022
