Billionaire Elon Musk on Friday decided to back out of his $44 billion deal to buy Twitter, citing ongoing disagreements over the number of spam accounts on the platform.
While Musk may want to end his bid for Twitter, it’s not as simple as just walking away, according to legal experts. Instead, Musk likely faces a lengthy court battle with Twitter that could take many months to resolve.
Twitter’s board is in a very difficult position, said Ann Lipton, a professor of corporate governance at Tulane Law School. “They can’t just say, ‘Okay, let’s save us the pain, Elon, we’ll let you knock the price down to $20 a share, or we’ll make a deal, we’ll agree to walk away if you just pay a billion dollar break fee . I mean, Twitter just isn’t capable of doing that.”
That would risk a lawsuit from Twitter shareholders, she added. Twitter shareholders have already filed a lawsuit against the company and Elon Musk himself over the chaotic deal.
Merger agreements are “very hard to pull off,” and so far Musk doesn’t seem to have provided enough evidence to support his claims that Twitter lied about its spam data, Lipton said.
Meanwhile, Twitter chairman Bret Taylor has already promised that the company’s board will take legal action against Musk.
“Twitter’s board is committed to closing the transaction at the price and terms agreed upon with Mr. Musk and plans to take legal action to enforce the merger agreement,” Taylor tweeted.
“We are confident that we will prevail in the Delaware Court of Chancery,” Taylor added, referring to a Delaware court that settles disputes between businesses.
Musk signed a legally binding agreement in April to buy Twitter for $54.20 per share. The agreement states that if either party terminates the deal, it will have to pay a breakup fee of $1 billion.
Shortly after the agreement was reached, Musk began hinting that he was having second thoughts about the deal. In May, Musk said he decided to stop the Twitter acquisition as he assessed the company’s claims that about 5% of its monetizable daily active users (mDAU) were spam accounts. Twitter said it continued to share information with Musk, including turning over its “firehose,” the daily stream of tweets that flow through the platform.
In a letter Friday, Musk’s lawyers accused Twitter of “material breach of multiple provisions” of the deal agreement and said the company made “false and misleading statements” about the proliferation of fake accounts on its platform.
“There are many reasons to doubt this [Twitter] has made such misrepresentations, but let’s face it, that’s not really a reason to void a merger agreement,” Lipton said in an interview.
For there to be a “material breach” of the deal agreement, Musk would have to prove that Twitter made misrepresentations that were so egregious that they would have a long-term impact on the company’s earnings potential, Lipton said.
“He has yet to provide evidence that this is indeed the case,” she added.
Twitter appears to have the upper hand as the deal drama goes to court, Lipton said. The merger agreement includes a “specific performance clause” that says Twitter has the right to sue Musk to force him to go through with the deal as long as he still has debt financing.
In the coming days, Twitter is likely to file a lawsuit in Delaware and ask a judge to rule on whether it violated the terms of the settlement, then order Musk to “fulfill his contractual obligations and complete the merger,” said Brian Quinn, a professor at Boston College Law School.
Afterward, Quinn said he expects both sides to continue making their case in court as part of a trial that could take a year. “For litigation, that’s fast,” he added.
Musk and Twitter may also reach an agreement.
Twitter may agree to a small change in the deal price of $54.20 per share to avoid litigation, Lipton said. That may not sit well with Twitter shareholders, who liked the first offer. The purchase price represents a 38% premium to the company’s share price of $39.31 at the close on April 1, 2022, which was the last trading day before Mr. Musk disclosed his approximately 9% stake in the company. Shares of Twitter closed at $30.04 on Friday.
It’s unclear what Musk would settle for, Lipton said.
“I don’t know if Musk just wants to knock a dollar or two off the stock price,” she said. “I think Musk wants there to be no deal or a pretty dramatic revaluation.” So I don’t think the parties are close to a settlement right now.”
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