Elon Musk faces an uphill battle if Twitter takes him to court over the Tesla founder’s attempt to pull out of an agreed $44bn takeover of the platform, legal experts predict.
Musk made the following statement on Friday 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.
TwitterMusk responded by declaring plans to sue him in Delaware Court of Chancery. The Delaware Court of Chancery is where the company is formed. He will be forced to honor the deal at the agreed price of $54.20 a share.
This is the beginning of a costly legal battle that could lead to further financial ruin for the company.
Twitter could choose to settle with Musk or negotiate for a lower price in order to avoid the hefty legal fees, uncertainty and layoffs that would result.
According to legal experts, Musk and his legal team will face a difficult task if the deal is challenged in court.
“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 a company has experienced a “material adverse effect” (MAE) to void a merger agreement, citing a deterioration of the target company’s business results as proof.
However, Delaware courts only once have ruled that a company cannot escape via MAE. Musk, on the other hand, can rely upon other legal arguments in order to avoid a deal.
Musk claims that Twitter has violated three different provisions of its contract. He stated that Twitter had failed to provide sufficient information regarding fake and spam accounts in order to allow financial planning to be possible 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 has been discussing the fake accounts issue for months in interviews and his own tweets. Twitter has supported the 5 percent figure and has agreed to comply with some of his data demands. The company stated that it could not share all the data required to perform the assessment with third parties because this includes sensitive user information, which is protected under privacy laws.
“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. Several Wall Street banks have committed $13bn to Musk’s debt. As banks struggle to place the bonds and loans that will support other leveraged buyouts, debt pricing has become much more expensive.
Musk has also promised to contribute more than $30bn of equity. Musk previously stated that he had arranged for co-investors, including private capital firms like Brookfield and Andreessen Horowitz, to help ease the burden. Tesla shares have fallen more than 35% this year, and Musk sold $8.5 billion worth of shares to 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.”
Musk would have to pay a $1bn termination fee if the transaction was canceled. Twitter has negotiated a “specific performance clause” that will commit Musk to closing the deal if all other conditions are met.
Although the Delaware courts are generally unimpressed by buyers who argue a MAE, technical violations of covenants, or representations they have found fault with them in most cases 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.
Experts warn that even if Twitter wins the court case, the judge might not allow Twitter to force through a deal.
“It’s very daunting to order specific performance in a situation like this. There’s external financing that has to be made to perform. What if Musk ignores 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. To avoid an embarrassing and expensive trial, both sides could opt for a recut contract.
Anaplan, a software company, agreed to reduce its $11bn sale price to Thoma Bravo. This was after Thoma Bravo claimed Anaplan had violated the merger agreements by paying $32mn more in bonuses to employees than disclosed in the merger contract.
Anaplan stated in securities filings that they did not believe the excess bonuses were breaching, but that to avoid a legal fight, they agreed to a lower price.
Musk and Twitter could agree on a damages payout rather than a revised price. However, that cap in the merger agreement is $1bn. The sides could agree to a larger number to end hostilities.
Should the conflict reach a courtroom, Musk’s testimony could prove the highlight.
He sat down with a lawyer in 2021 to represent Tesla shareholders, who had accused him improperly of bailing out. SolarCityAnother Musk company, which Tesla acquired in 2017.
“I think you are a bad human being,” Musk told the lawyer who quizzed him. Musk was cleared by the Delaware court from any wrongdoing.
Richard Waters in San Francisco and Antoine Gara New York contributed additional reporting