Elon Musk, the mysterious and charismatic entrepreneur, made it official Friday. In a regulatory filing, he stated that he has decided to renounce his $44 billion deal with Twitter Inc. to buy it. This is a deal that many people had never anticipated would be possible.
It is now a matter of who has the best case for litigation when it comes down to Twitter.
Bret Taylor, Chairman of the company, stated that the company would pursue the matter in a breach-of contract suit. Experts told MarketWatch the Delaware Chancery Court will likely move fast to review any filings, which Twitter’s lawyers are likely working on this weekend, that will seek either the full $44 billion that Musk promised to pay or, at the very least, the $1 billion breakup fee.
“I assume they will try to get a preliminary injunction to force Musk to close by the specific performance clause in the contract,” said Stephen Diamond, an associate professor of law at Santa Clara University School of Law. “Barring that, they will demand $1 billion dollars in damages,” the reverse termination fee that the parties agreed to when they agreed to Musk’s $54.20-a-share offer in April.
Experts said that Musk and his Skadden Arps legal team will likely sue or countersue Twitter in breach of contract. This was after Musk sent a letter to Twitter Friday stating his intent to end the agreement.
“There also may be dueling lawsuits,” said Carl Tobias, the Williams professor of Law at the University of Richmond School of Law. “Twitter may file in Delaware, and Musk may want to file in Texas or California or wherever he thinks is more favorable.”
Musk’s lawyers, in their letter to Twitter’s Chief Legal Officer Vijaya Gadde, state that Twitter is in breach of two sections of the merger agreement, for not providing information requested since May 9. They cited five examples of information Twitter has failed to provide, with the biggest focus on Twitter’s calculation of “bot” and active-user accounts. As mentioned in the previous columnMusk said that bots are a problem he would fix In the press release that announced the mergerThey are not something he discovered after signing the contract, suggesting that they are not something he knew about.
Few truly believe Musk is concerned about Twitter’s spam disclosures — this is an attempt to get Twitter to agree to a lower price, after stocks were slammed in the first half of this year and made an overpriced deal look even more expensive. Musk clearly had a good case of buyer’s remorse over the hefty price he offered for Twitter, as the overall price of Tesla Inc.
— which makes up a huge portion of his fortune — declined in the overall market downdraft.
Musk and his lawyers may have realized that the bot issue could be a losing cause. They claim that Twitter made staffing changes without Musk’s approval and said that he is “examining the company’s recent financial performance and revised outlook, and is considering whether the company’s declining business prospects and financial outlook” could lead to an out.
Diamond, who teaches on business law, securities law, corporate finance and corporate governance, said those arguments — that an acquisition target has had a dramatic change in its business since the merger agreement was signed — is not a likely winner in the court where the trial is likely to be held.
“Delaware is very skeptical of these kinds of arguments, they rarely succeed if ever,” he said.
Musk and Twitter could work out a deal that’s lower in price. However, this is unlikely to happen before they go to court. Diamond suggested that it’s more likely they will agree to a deal when Twitter has proved its case.
“It’s possible if Twitter gets the performance order, they will use it to close, but maybe at a slightly lower price,” Diamond said, referring to the court potentially ordering Musk to live up to the merger agreement.
Musk is a great addition to the Twitter board, but ultimately, it would be better for the company and the Twitter board. Musk’s potential takeover has not been well received by employees. the company, taking it private and allowing Twitter to become a platform for freedom of speech “within the law.” The company has already lost some high profile engineers as a result of Musk’s looming deal.
Diamond stated that he felt the board shouldn’t have engaged Musk at such a high level.
“I feel that Twitter’s stakeholders — including people like me who use Twitter and shareholders — have a real beef with the CEO for getting into bed with this guy in the first place,” Diamond said. “He is not a reliable business partner. It’s not socially responsible capitalism.”
Although it may seem true, the benefit of hindsight is not so great now. Twitter should meet Musk in court to demand $1 billion. Although it would be better for Twitter not to be run by Musk the company will still need his money to continue its progress.