Elon Musk notified Twitter on Friday that he would forgo an agreed acquisition deal worth $44bn (£36.6bn). The move sets the stage for 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 of succeeding.
Why is Musk away??
The crux of Musk’s case rests on his belief that the number of Twitter spam accounts is much higher than the company’s assertion of less than 5% of daily active users.
The letter from Musk’s attorney, whose shares in his electric car company, Tesla, funded the deal, says that underrepresenting the number of spam accounts on the platform – something Twitter denies – constitutes a “material negative effect for the company”, which in effect means that there is Something is seriously wrong in the business and is not worth anywhere near $54.20 per share agreed.
How strong is the mask case?
The merger agreement contains clause (6.4) stating that Twitter must provide Musk with all data and information requested by the billionaire “for any reasonable business purpose in connection with the consumption of the transaction.” This is a covenant in the deal — a promise to act a certain way during the sale — and a breach of it would allow Musk to walk away without penalties.
But legal experts have questioned whether failing to provide more than what Twitter has already shared regarding its bot count would break the covenant. The Agreement uses the word “reasonable” frequently when determining which information requests are acceptable.
“The agreement does not give him the right to receive any information, for any reason,” said Brian Quinn, assistant professor at Boston College of Law. “He will bear the burden of proof to the court that he had a legitimate need for the information and that his requests were reasonable. He cannot use unreasonable information requests to create a pretext to claim a breach.”
Quinn describes the material adverse effect clause as “essentially unsuccessful”. “His message basically admits this: it says they are still thinking [the alleged spam problem] Outside. It’s not strong and it will fail.”
Does Musk have any other legal arguments??
His lawyers also argue that Twitter violated the merger agreement by not seeking Musk’s approval when he fired two executives and laid off a third of his talent acquisition team (or human resources). This may seem a narrow basis for closing the deal, but the agreement states (Section 6.1) that Musk must be notified when Twitter deviates from its obligation to conduct business in the normal course and must “substantially maintain the hardware of the existing business organization.”
Quinn believes this argument has some weight and the matter will be considered by the court. But he added, “My guess here is that the court will probably decide that these dismissals are more like normal business than not.”
Alternatively, Musk could try to go the financing route. Specific Performance Clause (9.9) requires that the debt financing underlying a significant portion of the transaction “has been or will be funded at closing.” However, the bank’s $13 billion funding commitment is also covered by a legal agreement, so Twitter is expected to consider its legal options if Musk’s banks try to pull out.
what or what Hey TwitterOptions?
Twitter chief Brett Taylor said on Friday that the company would “follow the legal process to enforce the merger agreement.” If he does, the case will be heard in Delaware, the US state that has jurisdiction over the deal.
Quinn said he expects Twitter to file a request for a declaratory ruling that it is not violating the agreement and that Musk cannot walk away.
Experts also expect Twitter to seek a court order that Musk specifically fulfill his obligations under the agreement — in other words, that he’s buying the company. This is known as “performance specific”.
“They will sue in a Delaware court for certain performance,” said John Coffey, a professor of law at Columbia University. “Any order request would force Musk and his subsidiaries to close the deal at the original price.”
The company also has the option of seeking a $1 billion break fee from Musk as per the agreement, rather than being forced to buy it.
Is settlement possible?
If Twitter wins his case, it could force the world’s richest man to buy a company he doesn’t want.
“Most such disputes usually end in settlements that allow plaintiffs and defendants to save face,” said Carl Tobias, chair of the law department at Williams University of Richmond.
There’s also the possibility that if Musk finds that he still wants to own Twitter, but is worried about overpaying, the two sides will agree to a lower price. However, Twitter’s institutional contributors may resist that.
“I doubt the court will rule before a settlement is reached, and the daily Twitter price will give you an idea of what Musk is hoping to pay,” Covey said. Twitter shares are currently trading at less than $37, valuing the company at $28 billion.