What’s Subsequent within the Elon Musk-Twitter Saga? A Courtroom Battle

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 will probably be decided by what could also be an epic courtroom battle, involving months of pricey litigation and high-stakes negotiations by elite attorneys on each side.

The query is whether or not Mr. Musk will probably be legally compelled to stay 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, partly as a result of Mr. Musk hooked up few strings to his settlement to purchase the corporate, and the corporate is set to power the deal by.

However Mr. Musk revels in impulsiveness and brinkmanship and is backed by a fleet of high bankers and attorneys. Somewhat than participating in a protracted public brawl with the world’s richest man and his legions of die-hard followers, Twitter may come below stress to discover a swift and comparatively peaceable decision — one that would protect the corporate’s independence however go away it in a tenuous monetary place.

Mike Ringler, a associate at Skadden, Arps, Slate, Meagher & Flom who’s representing Mr. Musk, knowledgeable Twitter late on Friday that his shopper 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 mentioned that Mr. Musk didn’t imagine the metrics that Twitter has publicly disclosed about what number of of its customers have been pretend.

Twitter’s board responded by saying it supposed to consummate the acquisition and would sue Mr. Musk in a Delaware chancery courtroom to power him to take action.

On 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 interrupt off his deal by paying a $1 billion price, however solely below particular circumstances similar to shedding debt financing. The settlement additionally requires Twitter to supply knowledge that Mr. Musk could require to finish the transaction.

Mr. Musk has demanded that Twitter give an in depth accounting of the spam on its platform. All through 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 toes in regards to the Twitter deal coincided with an enormous slide within the valuation of expertise firms, together with Tesla, the electrical car firm he runs, which can be his primary 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 find out 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 courtroom says Musk can stroll away,” mentioned David Larcker, a professor of accounting and company governance at Stanford College. “One other consequence is that he’s pressured to undergo with the deal, and the courtroom can implement this. Or there could be some center floor the place there’s a value renegotiation.”

For Twitter, finishing a sale to Mr. Musk is important. It struck its cope with Mr. Musk as expertise firms have been having fun with optimistic valuations; some, like Snap and Meta, have now plummeted as they face promoting stress, world financial upheaval and rising inflation. Twitter’s inventory has fallen about 30 % because the deal was introduced, and trades properly below the Mr. Musk’s providing value of $54.20 a share.

Authorized consultants mentioned Mr. Musk’s dispute over spam may very well be a ploy to power Twitter again to the bargaining desk in hopes of securing a cheaper price.

Throughout the deal-making, no different potential purchaser emerged as a white knight various to Mr. Musk, making his supply the perfect that Twitter is prone to get.

Twitter’s trump card is a “particular efficiency clause” that offers the corporate the precise to sue Mr. Musk and power him to finish or pay for the deal, as long as the debt financing he has corralled stays intact. Pressured acquisitions have occurred earlier than: In 2001, Tyson Meals tried to again out of an acquisition of the meatpacker IBP, pointing to IBP’s monetary troubles and accounting irregularities. A Delaware courtroom vice chancellor dominated that Tyson needed to full the acquisition,

However authorized authority is completely different than sensible actuality. A lawsuit will most likely price tens of millions in authorized charges, take months to resolve and add additional uncertainty to already jittery workers.

Deal disagreements have typically led to settlements or renegotiations on value. In 2020, luxurious large LVMH Moët Hennessy Louis Vuitton tried to interrupt up its $16 billion deal to accumulate Tiffany & Firm, finally securing a reduction of about $420 million.

“These things is a bargaining transfer in an financial transaction,” mentioned Charles Elson, a just lately retired professor of company governance on the College of Delaware. “It’s all about cash.”

A cheaper price would profit Mr. Musk and his monetary backers, particularly as Twitter faces monetary headwinds. However Twitter has made clear it needs to power Mr. Musk to stay to his $44 billion supply.

Probably the most damaging consequence for Twitter can be for the deal to break down. Mr. Musk would want to point out that Twitter materially and deliberately breached the phrases of its contract, a excessive bar that acquirers have not often met. Mr. Musk has claimed that Twitter is withholding info vital 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 courtroom {that a} materials change within the goal firm’s enterprise provides it the power to cleanly exit the deal. That occurred in 2017 within 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 when Twitter exhibits that it didn’t violate the merger settlement, a chancellor within the Delaware courtroom should still permit Mr. Musk to pay damages and stroll away, as within the case of Apollo International Administration’s deal combining the chemical firms 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 a sophisticated course of to supervise, and a chancellor could not wish to order a purchaser to do one thing that he finally doesn’t comply with by on, a threat that’s significantly acute on this deal, given Mr. Musk’s behavior of flouting authorized confines.

“The worst-case state of affairs for the courtroom is that it makes an order and that he doesn’t comply, and so they have to determine what to do about it,” mentioned Morgan Ricks, a professor at Vanderbilt Regulation College.

Whereas Mr. Musk sometimes depends on a small circle of confidants to run his companies, which embody the rocket maker SpaceX, he has introduced in a bigger authorized crew to oversee the Twitter acquisition. Along with 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 courtroom, together with LVMH’s try to interrupt off its acquisition of Tiffany.

On its facet, Twitter has deployed attorneys from two companies, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to handle the deal. Wilson Sonsini is Twitter’s longtime authorized counsel, which constructed its popularity on offers in enterprise capital and expertise. Simpson Thacher is a New York-based legislation agency with extra expertise on the whole company mergers and acquisitions.

If Twitter renegotiates its acquisition value 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 going through over the acquisition. In April, monetary analysts referred to as Mr. Musk’s value a lowball supply, and Twitter shareholders might balk if the corporate agrees to additional cut back its acquisition value.

A breakup might additionally convey added authorized scrutiny to Mr. Musk. The Securities and Change Fee revealed in Could 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 costs that his tweet falsely claiming he had secured funding to take Tesla non-public amounted to securities fraud.

“On the finish of the day, a merger settlement is only a piece of paper. And a chunk of paper may give you a lawsuit in case your purchaser will get chilly toes,” mentioned Ronald Barusch, a retired mergers and acquisitions lawyer who labored for Skadden Arps earlier than it represented Mr. Musk. “A lawsuit doesn’t offer you a deal. It typically provides you a protracted headache. And a broken firm.”