Elon Musk faces an uphill battle if Twitter takes him to court over the Tesla founder’s attempt to back out of a negotiated $44 billion acquisition of the platform, legal experts predict.
On Friday, Musk said Twitter was in “material breach of multiple clauses” of the deal that gave him the right to pull out, ending weeks of speculation about the billionaire’s desire to buy the company.
Twitter hit back, announcing plans to sue Musk in Delaware Court of Chancery, where the company is incorporated, to force him to honor the deal at the agreed price of $54.20 per share.
I think we’ll finally see if Elon Musk is ‘above the law’
The action and counteraction set the stage for a costly legal battle that could plunge the company into further turmoil.
Twitter could choose to accept a settlement or negotiate with Musk for a lower price to avoid what would be heavy legal fees and added uncertainty amid layoffs and low morale at the company.
But if the deal goes all the way through the courts, Musk and his legal team face a tough challenge, according to legal experts who suggest Twitter may have the upper hand.
“I think we’re finally going to see if Elon Musk is ‘above the law,'” said John Coffey of Columbia University Law School. “I’m convinced that in Delaware courts, the answer is no. The law is pretty clear that you can’t back out of a deal in the way he’s looking for.
Reluctant buyers have in the past tried to argue that a company has suffered a “material adverse effect” (MAE) to void a merger agreement, citing a deterioration in the target company’s business results as evidence.
However, Delaware courts have only once ruled that a company can escape through the MAE, leaving reticent buyers like Musk to rely on other legal arguments to avoid a deal.
Musk claims that Twitter violated three separate terms of its deal agreement. First, he said Twitter repeatedly failed to provide adequate information about fake and spam accounts needed to facilitate the financial planning of the transaction.
Second, Musk’s representatives say they performed a preliminary assessment of what data they had access to and found that the number of spam and fake accounts on the platform was “much higher” than the 5 percent estimated by Twitter. Therefore, Twitter’s public disclosures as part of the deal contained “materially inaccurate statements,” they said.
Finally, Musk argued that the departure of key Twitter employees after the deal was signed showed that Twitter was deviating from its obligation to “conduct its business in the ordinary course,” another violation that could provide an escape hatch for Musk.
For months, Musk has raised the issue of fake accounts in interviews and in his own tweets. Twitter defended the 5 percent figure as accurate and agreed to some of his data demands. However, the company indicated that it cannot share the full set of data needed to perform the assessment with third parties because it includes sensitive user information protected by privacy laws.
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“A request to provide information does not necessarily justify a denial of closure.” [the deal]Coffee said.
More broadly, Twitter is likely to argue that Musk’s concerns are simply masking buyer’s qualms about an expensive, highly leveraged deal. Musk has received $13 billion in debt obligations from several Wall Street banks. Debt pricing has become significantly more expensive in recent weeks as banks have had trouble placing loans and bonds that support other leveraged buyouts.
Musk has also committed to amassing more than $30 billion in equity on his own. He previously announced that he had lined up some co-investors, including private equity firms such as Brookfield and Andreessen Horowitz, to ease the burden. Tesla shares have tumbled more than 35 percent so far this year, and Musk himself sold $8.5 billion worth of stock to help finance the deal.
“Musk will have to prove that these are actual violations of the agreement,” said Anne Lipton, a professor of corporate law at Tulane University. “But because his behavior so far has so brazenly demonstrated that he is looking for any excuse to withdraw, he will start the case with a serious credibility problem.”
The terms of the deal include a $1 billion break-up fee that Musk would have owed if he was ultimately responsible for the deal’s collapse. Twitter agreed to a so-called specific performance clause, which obligates Musk to close the deal if all other closing conditions are met.
Although Delaware courts have generally not been impressed by buyers arguing either MAE or technical breaches of covenants or representations, in a few cases buyers have been successful.
For example, the Delaware Court of Chancery ruled in 2020 that Korea’s Mirae could terminate its acquisition of a chain of luxury hotels owned by China’s Anbang because the seller had not managed the business in a manner consistent with past practice after the deal was signed .
Even if Twitter wins in court, the judge may oppose actually enforcing a deal, experts note.
“It’s very daunting to commission a specific performance in a situation like this. There is external funding that needs to be done to run it. And what if Musk ignores your order. It’s turning into a clash of court jurisdiction and powers — what’s going on at the ground level?” Morgan Ricks, a Vanderbilt law professor, wrote on Twitter.
The courtroom battle between Musk and Twitter could turn out to be a long one, as the proceedings will have to dive into the details of Twitter’s business and the company’s actions after the signing. Instead, the parties could move to reshape the deal to avoid an expensive and potentially embarrassing process.
In June, software company Anaplan agreed to cut its sales price to Thoma Bravo by $400 million in an $11 billion deal after the private equity firm said Anaplan breached the merger agreement by paying $32 million more in recent employee bonuses than was disclosed in the merger agreement.
Anaplan insisted in securities filings that it did not believe the excess bonuses constituted a violation, but to avoid a legal battle, it agreed to take a lower price.
If Musk and Twitter agree to pay compensation in lieu of a revised price, the merger agreement caps that figure at $1 billion. However, the parties can simply agree on a larger number to end hostilities.
If the conflict reaches a courtroom, Musk’s testimony could prove to be the tipping point.
In 2021, he dramatically clashed with a lawyer representing Tesla shareholders who had accused him of improperly bailing out SolarCity, another Musk company that Tesla had acquired in 2017.
“I think you’re a bad human being,” Musk told the lawyer who questioned him. A Delaware court cleared him of any wrongdoing in that buyout.
Additional reporting by Richard Waters in San Francisco and Antoine Garra in New York
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