The Elon Musk-Twitter Saga Now Moves to the Courts

Now that Elon Musk has signaled his intent to wander away from his $44 billion provide to invest in Twitter, the fate of the influential social media network will be identified by what may be an epic court fight, involving months of pricey litigation and higher-stakes negotiations by elite legal professionals on the two sides.

The dilemma is irrespective of whether Mr. Musk will be lawfully compelled to adhere with his agreed-on acquisition or be authorized to back again out, quite possibly by shelling out a 10-figure penalty.

Most legal authorities say Twitter has the higher hand, in part simply because Mr. Musk connected number of strings to his agreement to invest in the organization, and the enterprise is determined to force the offer by means of.

But Mr. Musk revels in impulsiveness and brinkmanship and is backed by a fleet of leading bankers and lawyers. Fairly than engaging in a protracted community brawl with the world’s richest gentleman and his legions of die-difficult followers, Twitter may arrive below strain to obtain a swift and reasonably tranquil resolution — a single that could preserve the company’s independence but depart it in a tenuous money situation.

Mike Ringler, a lover at Skadden, Arps, Slate, Meagher & Flom who is symbolizing Mr. Musk, informed Twitter late on Friday that his customer was abandoning the takeover. Mr. Ringler argued in his letter that Twitter experienced violated the agreement with Mr. Musk by not supplying him with thorough details about how it measures inauthentic accounts. He also said that Mr. Musk did not feel the metrics that Twitter has publicly disclosed about how several of its end users ended up pretend.

Twitter’s board responded by stating it supposed to consummate the acquisition and would sue Mr. Musk in a Delaware chancery court docket to pressure him to do so.

At the coronary heart of the dispute are the phrases of the merger agreement that Mr. Musk reached with Twitter in April. His agreement with Twitter allows him to split off his offer by shelling out a $1 billion price, but only below particular situation this sort of as dropping financial debt financing. The settlement also necessitates Twitter to provide details that Mr. Musk may possibly involve to total the transaction.

Mr. Musk has demanded that Twitter give a thorough accounting of the spam on its system. All over June, legal professionals for Mr. Musk and Twitter have wrangled in excess of how considerably info to share to satisfy Mr. Musk’s inquiries.

Mr. Musk’s chilly ft about the Twitter offer coincided with a massive slide in the valuation of technology companies, which includes Tesla, the electrical car or truck organization he operates, which is also his most important source of prosperity. Mr. Musk did not react to a request for comment.

Twitter maintains that its spam figures are precise, but has refused to publicly depth how it detects and counts spam accounts simply because it utilizes non-public information and facts, like users’ cellphone numbers and other digital clues about their identities, to decide no matter whether an account is inauthentic. A Twitter spokesman declined to comment on when Twitter planned to sue to implement the merger agreement.

“The results are: The courtroom states Musk can stroll away,” stated David Larcker, a professor of accounting and corporate governance at Stanford College. “Another end result is that he is compelled to go by way of with the deal, and the court docket can enforce this. Or there may well be some middle floor where by there is a price renegotiation.”

For Twitter, finishing a sale to Mr. Musk is essential. It struck its offer with Mr. Musk as engineering providers were being having fun with optimistic valuations some, like Snap and Meta, have now plummeted as they experience promoting tension, global financial upheaval and mounting inflation. Twitter’s inventory has fallen about 30 % since the deal was introduced, and trades effectively underneath the Mr. Musk’s supplying rate of $54.20 a share.

Authorized authorities claimed Mr. Musk’s dispute in excess of spam could be a ploy to drive Twitter back to the bargaining desk in hopes of securing a reduce value.

During the deal-building, no other likely customer emerged as a white knight alternative to Mr. Musk, creating his present the ideal that Twitter is most likely to get.

Twitter’s trump card is a “specific functionality clause” that presents the business the ideal to sue Mr. Musk and force him to finish or pay for the offer, so very long as the debt funding he has corralled continues to be intact. Compelled acquisitions have occurred before: In 2001, Tyson Foodstuff experimented with to again out of an acquisition of the meatpacker IBP, pointing to IBP’s money problems and accounting irregularities. A Delaware court docket vice chancellor dominated that Tyson experienced to total the acquisition,

But legal authority is distinctive than useful fact. A lawsuit will probably value hundreds of thousands in lawful fees, just take months to take care of and incorporate even more uncertainty to by now jittery employees.

Deal disagreements have frequently finished in settlements or renegotiations on price tag. In 2020, luxurious huge LVMH Moët Hennessy Louis Vuitton attempted to crack up its $16 billion deal to get Tiffany & Business, in the long run securing a discounted of about $420 million.

“This things is a bargaining go in an financial transaction,” stated Charles Elson, a just lately retired professor of company governance at the College of Delaware. “It’s all about cash.”

A reduce rate would reward Mr. Musk and his fiscal backers, specially as Twitter faces economical headwinds. But Twitter has designed clear it would like to power Mr. Musk to stick to his $44 billion give.

The most harming result for Twitter would be for the offer to collapse. Mr. Musk would have to have to present that Twitter materially and deliberately breached the phrases of its deal, a superior bar that acquirers have hardly ever met. Mr. Musk has claimed that Twitter is withholding details required for him to near the offer. He has also argued that Twitter misreported its spam figures, and the deceptive data hid a critical problem with Twitter’s organization.

A buyer has only at the time properly argued in a Delaware courtroom that a substance transform in the concentrate on company’s business enterprise offers it the skill to cleanly exit the deal. That occurred in 2017 in the $3.7 billion acquisition of the pharmaceutical company Akorn by the health and fitness care enterprise Fresenius Kabi. Right after Fresenius signed the agreement, Akorn’s earnings fell and it faced allegations by a whistle-blower of skirting regulatory necessities.

Even if Twitter exhibits that it did not violate the merger settlement, a chancellor in the Delaware court may possibly still let Mr. Musk to shell out damages and walk absent, as in the circumstance of Apollo International Management’s offer combining the chemical firms Huntsman and Hexion in 2008. (The lawsuits concluded in a damaged offer and a $1 billion settlement.)

Forcing an acquirer to acquire a business is a intricate process to oversee, and a chancellor may well not want to order a purchaser to do something that he eventually does not follow by way of on, a threat that is notably acute in this offer, presented Mr. Musk’s practice of flouting legal confines.

“The worst-scenario scenario for the courtroom is that it helps make an purchase and that he does not comply, and they have to determine out what to do about it,” mentioned Morgan Ricks, a professor at Vanderbilt Regulation College.

Whilst Mr. Musk usually depends on a tiny circle of confidants to operate his companies, which consist of the rocket maker SpaceX, he has introduced in a more substantial authorized workforce to supervise the Twitter acquisition. In addition to his personalized attorney, Alex Spiro, he tapped lawyers from Skadden, Arps, Slate, Meagher & Flom.

Skadden is a go-to corporate law firm, with enough experience arguing instances in entrance of the Delaware court, such as LVMH’s try to crack off its acquisition of Tiffany.

On its aspect, Twitter has deployed legal professionals from two firms, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to manage the deal. Wilson Sonsini is Twitter’s longtime authorized counsel, which constructed its popularity on discounts in enterprise money and technological know-how. Simpson Thacher is a New York-centered legislation agency with more practical experience in normal company mergers and acquisitions.

If Twitter renegotiates its acquisition rate or accepts a break up, it will probably encounter far more legal problems. Shareholders would sue above possibly scenario, adding to a number of shareholder lawsuits Twitter is by now experiencing about the acquisition. In April, fiscal analysts referred to as Mr. Musk’s selling price a lowball give, and Twitter shareholders could balk if the firm agrees to even further lessen its acquisition rate.

A separation could also bring included legal scrutiny to Mr. Musk. The Securities and Exchange Fee discovered in Could that it was examining Mr. Musk’s purchases of Twitter stock and no matter whether he appropriately disclosed his stake and his intentions for the social media business. In 2018, the regulator secured a $40 million settlement from Mr. Musk and Tesla about costs that his tweet falsely proclaiming he had secured funding to just take Tesla non-public amounted to securities fraud.

“At the end of the working day, a merger arrangement is just a piece of paper. And a piece of paper can give you a lawsuit if your customer receives chilly ft,” said Ronald Barusch, a retired mergers and acquisitions law firm who worked for Skadden Arps just before it represented Mr. Musk. “A lawsuit doesn’t give you a deal. It usually provides you a protracted headache. And a harmed business.”