Musk’s About-Face on Twitter Shifts Takeover Saga to Delaware

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(Bloomberg) — Now that Elon Musk has decided that he doesn’t want to buy Twitter Inc. after all, he can’t just walk away from the $44 billion contract. Tesla Inc.’s co-founder and billionaire will have to argue his case in Delaware before a judge. If history is a guide, his job won’t be easy.

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Twitter Chairman Bret TAY vowed Friday that the platform would fight in Delaware Court of Chancery for Musk to comply with his agreement. The company has already filed a lawsuit. Bloomberg has been told by people familiar that a filing could be made as soon this week.

Musk could be ordered to pay $54.20 per share to Twitter shareholders if he is found guilty by a judge, as he stated in the April 25 agreement. A ruling in his favor would let Musk walk, though he’d probably have to pay a break-up fee, initially set at $1 billion. There’s also the prospect that both sides reach a settlement whereby Musk still makes the acquisition, potentially at a lower price.

This case will be closely examined by the judge. The court has not sided with parties like Musk who want to bail on acquisition commitments.

Musk’s rationale centers on automated user accounts known as bots and how Twitter accounts for them. He alleges that the social media platform is teeming with spam bots, disputing Twitter’s contention that they make up less than 5% of total users. Musk said in his Friday filing with the US Securities and Exchange Commission that Twitter’s failure to properly hand over specifics on the number of bots amounts to what’s known as a “company material adverse effect [MAE]” A judge must decide whether such an event has occurred and whether it justifies Musk’s cancellation.

Larry Hamermesh, a University of Pennsylvania law professor who specializes in Delaware corporate law disputes, describes an MAE as an “unexpected, fundamental, permanent” negative development — akin to blowing a hole in the transaction that can’t be fixed.

So far, Delaware courts have found only one case in which a clear MAE emerged — Fresenius SE’s $4.3 billion buyout bid in 2018 for rival drugmaker Akorn Inc. A judge blessed Fresenius’ decision to walk away from the deal after finding Akorn executives hid an array of problems that cast doubt on the validity of data backing up approval for some drugs and profitability of its operations.

Forcing Musk’s Hand

The agreement also gives Twitter officials so-called specific-performance rights, which means that if the judge finds Musk’s complaints about the bots data don’t rise to the level of an MAE, the platform can demand that the judge force Musk to consummate the buyout.

Musk’s decision to sign the deal without doing due diligence could work against him, said Robert Profusek, head of the mergers and acquisitions department at law firm Jones Day. “His lawyers’ argument that you don’t do diligence and test things out later simply isn’t the way things work in big ticket M&A and, if accepted, would put shareholders at risk,” he said in an interview.

Delaware chancery court judges are known for their expertise in interpreting what may look and sound to the layperson as a maze of legal jargon that seeks to delineate both sides’ rights and responsibilities in a merger and acquisition accord.

In the Twitter deal, the platform’s executives are obligated to promptly furnish Musk with “all information concerning the business, properties and personnel of the company and its subsidiaries as may reasonably be requested.” Musk contends management hasn’t met those duties in connection with the details of spam and bot accounts.

Twitter stated that it had provided extensive data about its user base. The company’s executives told media that it manually reviews thousands upon thousands of accounts each quarter in order to determine the spam bot count. They also stated that they believe that the actual number is far lower than what was disclosed in the filings. To determine if an account is being run by a human, the company relies on internal data such as phone numbers and Internet Protocol addresses.

The agreement also defines a “company material adverse effect,” as “any change, event, effect or circumstance which, individually or in the aggregate, has resulted in or would reasonably be expected to result in a material adverse effect on the business, financial condition or results of operations of the company and its subsidiaries.”

It is possible that the parties will reach an out-of court settlement. Musk’s effort to pull the plug on the deal is probably nothing more than a negotiating ploy, said Charles Elson, a retired University of Delaware professor and former head of the school’s Weinberg Center for Corporate Governance.

“This is not a material adverse change,” Elson said. “That’s just a negotiating position. He knows the Delaware courts are extremely reluctant to find something like that in these deals.”

To press its case, Twitter has hired merger law heavyweight Wachtell, Lipton, Rosen & Katz, according to people familiar with the matter. People familiar with the matter declined to identify themselves because it is confidential. The social media company hopes to file suit this week. It can hire Wachtell to gain access to Bill Savitt, Leo Strine and other lawyers, who were Chancellors of the Delaware Chancery Court.

Musk has brought in Quinn Emanuel Urquhart & Sullivan LLP. This firm was instrumental in Musk’s successful defense of a defamation case in 2019. They are representing him in an ongoing shareholder lawsuit arising from his unsuccessful attempt to privatize Tesla in 2018.

Twitter Morale Sinks

No matter what the outcome of legal wrangling may be, many employees at San Francisco-based Twitter are unhappy, people close to the company told Bloomberg. Many employees are unhappy with the lack of leadership and vision-setting at the top amid uncertainty about a potential sale. Parag Agrawal, Chief Executive Officer, was one of those who spoke anonymously to discuss internal matters.

Many Twitter employees find neither one of these outcomes appealing. If Twitter wins, it will likely be led by an indecisive and reluctant owner who is still struggling to reach ambitious growth targets. And should Musk succeed in ending the deal, Twitter stock will likely plummet, and a staff already dejected by Musk’s months-long public criticism of the site will suffer another emotional blow.

Several people have left or are planning to leave because they simply don’t want to work for Musk, the people said. For some, the decision to depart was cemented after a June question-and-answer session during which Musk, who showed up late, told employees that only those who were “exceptional” would be allowed to continue working from home.

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