Elon Musk notified Twitter on Friday that he was pulling out of the agreed $44bn (£36.6bn) takeover. The move sets off a legal battle between the world’s richest man and the social media platform. Here, we explain what happens next and whether Musk has a chance to succeed.
Why is Musk leaving?
The core of Musk’s case centers on his belief that the number of spambot accounts on Twitter’s platform is much higher than the company’s claim of less than 5% of its daily active users.
The letter from lawyers for Musk, whose stakes in his electric car business, Tesla, would help finance the deal, argued that underrepresenting the number of spam accounts on the platform – something Twitter denies – had a “material adverse effect on the company ”, which effectively means that something is seriously wrong with the business and is not worth far from the agreed $54.20 per share.
How strong is Musk’s case?
The merger agreement contains a clause (6.4) stating that Twitter must provide Musk with any data and information the multibillionaire requests “for any reasonable business purposes related to the execution of the transaction.” It’s a covenant in the deal — a promise to act a certain way during the sale process — and breaking it would allow Musk to walk away without penalty.
But legal experts question whether failing to provide more than what has already been shared by Twitter regarding the number of bots would violate the covenant. The Agreement often uses the word “reasonable” when specifying what requests for information are acceptable.
“The agreement does not give him the right to receive any information for any reason,” said Brian Quinn, an associate professor at Boston College Law School. “He will bear the burden of proving to the court that he had a legitimate need for the information and that his requests were reasonable.” It cannot use unreasonable requests for information to create a pretext for claiming infringement.
Quinn describes the material adverse effect clause as “basically a non-starter.” “His letter actually acknowledges this: it says they still count [the alleged spam problem] outside. It is not strong and will fail.
Does Musk have other legal arguments?
His lawyers also argued that Twitter breached the merger agreement by not seeking Musk’s consent when it fired two executives and fired a third of its talent acquisition (or HR) team. This may seem like a limited basis for terminating a deal, but the agreement states (Clause 6.1) that Musk must be notified when Twitter deviates from its obligation to conduct its business in the ordinary course and must “keep substantially intact the material components of its current business organization.’
Quinn believes that argument has some weight, and the court will consider it. But, he added, “my guess here is that the court will probably decide that these layoffs are more like normal business than not.”
Alternatively, Musk could try to go the financing route. The specific performance clause (9.9) requires that the debt financing underlying a significant portion of the transaction “has been funded or will be funded at closing.” However, the banks’ $13 billion funding commitment is also covered by a legal settlement, so Twitter can be expected to consider its legal options if Musk’s banks try to pull out.
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What are the Twitter options?
Twitter Chairman Brett Taylor said Friday that the company would “pursue legal action to enforce the merger agreement.” If it does, the case will be heard in Delaware, the US state that has jurisdiction over the deal.
Twitter’s board has committed to closing the transaction at the price and terms agreed with Mr. Musk and plans to take legal action to enforce the merger agreement. We are confident that we will prevail in the Delaware Court of Chancery.
— Brett Taylor (@btaylor) July 8, 2022
Quinn said he expects Twitter to file a declaratory judgment that it’s not in breach of the agreement and that Musk can’t just walk away.
Experts also expect Twitter to seek a court order for Musk to specifically fulfill his obligations under the agreement — in other words, to buy the company. This is known as ‘specific performance’.
John Coffey, a law professor at Columbia University, said: “They will sue in the Delaware Chancery Court for specific performance. That is, a request for an injunction forcing Musk and his affiliates to close the deal at the original price.
The company also has the option of asking Musk for a $1 billion break fee under the deal, rather than forcing him to buy it.
Is an agreement possible?
If Twitter wins its case, it could force the world’s richest man to buy a business he doesn’t want.
“Most disputes like this usually end in settlements that allow plaintiffs and defendants to save face,” said Carl Tobias, the Williams Chair of Law at the University of Richmond.
There’s also the possibility that if Musk finds he still wants to own Twitter but is worried about overpaying, the two sides could settle for a lower price. However, Twitter’s institutional shareholders may oppose this.
“I doubt the court will rule before there’s a settlement, and the daily price of Twitter will give you some idea of what the Musk side will be hoping to pay,” Coffey said. Twitter shares are currently trading at less than $37, valuing the company at $28 billion.
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