Now that Elon Musk has signaled his intent to stroll away from his $44 billion supply to purchase Twitter, the destiny of the influential social media community might be decided by what could also be an epic court docket battle, involving months of pricey litigation and high-stakes negotiations by elite attorneys on each side.
The query is whether or not Mr. Musk might be legally compelled to stick together with his agreed-upon acquisition or be allowed to again out, probably by paying a 10-figure penalty.
Most authorized consultants say Twitter has the higher hand, partially as a result of Mr. Musk hooked up few strings to his settlement to purchase the firm, and the firm is set to drive the deal by means of.
But Mr. Musk revels in impulsiveness and brinkmanship and is backed by a fleet of prime bankers and attorneys. Rather than participating in a protracted public brawl with the world’s richest man and his legions of die-hard followers, Twitter would possibly come beneath stress to discover a swift and comparatively peaceable decision — one that would protect the firm’s independence however go away it in a tenuous monetary place.
Mike Ringler, a accomplice at Skadden, Arps, Slate, Meagher & Flom who’s representing Mr. Musk, knowledgeable Twitter late on Friday that his consumer was abandoning the takeover. Mr. Ringler argued in his letter that Twitter had violated the settlement with Mr. Musk by not offering him with detailed details about the way it measures inauthentic accounts. He additionally stated that Mr. Musk didn’t consider the metrics that Twitter has publicly disclosed about what number of of its customers had been pretend.
Twitter’s board responded by saying it supposed to consummate the acquisition and would sue Mr. Musk in a Delaware chancery court docket to drive him to accomplish that.
At the coronary heart of the dispute are the phrases of the merger settlement that Mr. Musk reached with Twitter in April. His contract with Twitter permits him to break off his deal by paying a $1 billion charge, however solely beneath particular circumstances akin to dropping debt financing. The settlement additionally requires Twitter to present knowledge that Mr. Musk might require to full the transaction.
Mr. Musk has demanded that Twitter give an in depth accounting of the spam on its platform. Throughout June, attorneys for Mr. Musk and Twitter have wrangled over how a lot knowledge to share to fulfill Mr. Musk’s inquiries.
Mr. Musk’s chilly ft about the Twitter deal coincided with an enormous slide in the valuation of expertise corporations, together with Tesla, the electrical car firm he runs, which can be his foremost supply of wealth. Mr. Musk didn’t reply to a request for remark.
Twitter maintains that its spam figures are correct, however has refused to publicly element the way it detects and counts spam accounts as a result of it makes use of non-public info, like customers’ telephone numbers and different digital clues about their identities, to decide whether or not an account is inauthentic. A Twitter spokesman declined to touch upon when Twitter deliberate to sue to implement the merger settlement.
“The outcomes are: The court says Musk can walk away,” stated David Larcker, a professor of accounting and company governance at Stanford University. “Another outcome is that he is forced to go through with the deal, and the court can enforce this. Or there might be some middle ground where there’s a price renegotiation.”
For Twitter, finishing a sale to Mr. Musk is important. It struck its take care of Mr. Musk as expertise corporations had been having fun with optimistic valuations; some, like Snap and Meta, have now plummeted as they face promoting stress, international financial upheaval and rising inflation. Twitter’s inventory has fallen about 30 % since the deal was introduced, and trades effectively beneath the Mr. Musk’s providing worth of $54.20 a share.
Legal consultants stated Mr. Musk’s dispute over spam could possibly be a ploy to drive Twitter again to the bargaining desk in hopes of securing a lower cost.
During the deal-making, no different potential purchaser emerged as a white knight different to Mr. Musk, making his supply the finest that Twitter is probably going to get.
Twitter’s trump card is a “specific performance clause” that provides the firm the proper to sue Mr. Musk and drive him to full or pay for the deal, as long as the debt financing he has corralled stays intact. Forced acquisitions have occurred earlier than: In 2001, Tyson Foods tried to again out of an acquisition of the meatpacker IBP, pointing to IBP’s monetary troubles and accounting irregularities. A Delaware court docket vice chancellor dominated that Tyson had to full the acquisition,
But authorized authority is completely different than sensible actuality. A lawsuit will most likely price thousands and thousands in authorized charges, take months to resolve and add additional uncertainty to already jittery workers.
Deal disagreements have usually led to settlements or renegotiations on worth. In 2020, luxurious big LVMH Moët Hennessy Louis Vuitton tried to break up its $16 billion deal to purchase Tiffany & Company, in the end securing a reduction of about $420 million.
“This stuff is a bargaining move in an economic transaction,” stated Charles Elson, a not too long ago retired professor of company governance at the University of Delaware. “It’s all about money.”
A lower cost would profit Mr. Musk and his monetary backers, particularly as Twitter faces monetary headwinds. But Twitter has made clear it desires to drive Mr. Musk to stick to his $44 billion supply.
The most damaging end result for Twitter can be for the deal to collapse. Mr. Musk would want to present that Twitter materially and deliberately breached the phrases of its contract, a excessive bar that acquirers have hardly ever met. Mr. Musk has claimed that Twitter is withholding info mandatory for him to shut the deal. He has additionally argued that Twitter misreported its spam figures, and the deceptive statistics hid a major problem with Twitter’s enterprise.
A purchaser has solely as soon as efficiently argued in a Delaware court docket {that a} materials change in the goal firm’s enterprise provides it the means to cleanly exit the deal. That occurred in 2017 in the $3.7 billion acquisition of the pharmaceutical firm Akorn by the well being care firm Fresenius Kabi. After Fresenius signed the settlement, Akorn’s earnings fell and it confronted allegations by a whistle-blower of skirting regulatory necessities.
Even if Twitter exhibits that it didn’t violate the merger settlement, a chancellor in the Delaware court docket should still enable Mr. Musk to pay damages and stroll away, as in the case of Apollo Global Management’s deal combining chemical Huntsman and Hexion in 2008. (The lawsuits concluded in a damaged deal and a $1 billion settlement.)
Forcing an acquirer to purchase an organization is an advanced course of to oversee, and a chancellor might not need to order a purchaser to do one thing that he in the end doesn’t observe by means of on, a danger that’s significantly acute on this deal, given Mr. Musk’s behavior of flouting authorized confines.
“The worst-case scenario for the court is that it makes an order and that he doesn’t comply, and they have to figure out what to do about it,” stated Morgan Ricks, a professor at Vanderbilt Law School.
While Mr. Musk sometimes depends on a small circle of confidants to run his companies, which embrace the rocket maker SpaceX, he has introduced in a bigger authorized workforce to supervise the Twitter acquisition. In addition to his private lawyer, Alex Spiro, he tapped attorneys from Skadden, Arps, Slate, Meagher & Flom.
Skadden is a go-to company legislation agency, with ample expertise arguing instances in entrance of the Delaware court docket, together with LVMH’s try to break off its acquisition of Tiffany.
On its aspect, Twitter has deployed attorneys from two corporations, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to handle the deal. Wilson Sonsini is Twitter’s longtime authorized counsel, which constructed its repute on offers in enterprise capital and expertise. Simpson Thatcher is a New York-based legislation agency with extra expertise on the whole company mergers and acquisitions.
If Twitter renegotiates its acquisition worth or accepts a breakup, it’s going to most likely face extra authorized issues. Shareholders would sue over both state of affairs, including to a number of shareholder lawsuits Twitter is already dealing with over the acquisition. In April, monetary analysts known as Mr. Musk’s worth a lowball supply, and Twitter shareholders might balk if the firm agrees to additional cut back its acquisition worth.
A breakup might additionally convey added authorized scrutiny to Mr. Musk. The Securities and Exchange Commission revealed in May that it was analyzing Mr. Musk’s purchases of Twitter inventory and whether or not he correctly disclosed his stake and his intentions for the social media firm. In 2018, the regulator secured a $40 million settlement from Mr. Musk and Tesla over prices that his tweet falsely claiming he had secured funding to take Tesla non-public amounted to securities fraud.
“At the end of the day, a merger agreement is just a piece of paper. And a piece of paper can give you a lawsuit if your buyer gets cold feet,” stated Ronald Barusch, a retired mergers and acquisitions lawyer who labored for Skadden Arps earlier than it represented Mr. Musk. “A lawsuit doesn’t give you a deal. It generally gives you a protracted headache. And a damaged company.”
