Now that Elon Musk has signaled his intention to back out of his $44 billion offer to buy Twitter, the fate of the influential social media network will be determined by what could turn out to be an epic legal battle involving months of expensive litigation and high-stakes negotiations by elite lawyers on both sides.
The question is whether Mr. Musk will be legally forced to stick to his agreed acquisition or will be allowed to back out, possibly by paying a 10-figure penalty.
Most legal experts say Twitter has the upper hand, in part because Mr. Musk has attached few conditions to his agreement to buy the company, and the company is determined to force the deal through.
But Mr Musk revels in being impulsive and on the edge, and is backed by a flotilla of top bankers and lawyers. Rather than engage in a protracted public spat with the world’s richest man and his legions of die-hard followers, Twitter may be under pressure to find a quick and relatively peaceful solution — one that preserves the company’s independence but leaves it in weak financial crisis position.
Mike Ringler, a partner at Skadden, Arps, Slate, Meagher & Flom, who represents Mr. Musk, informed Twitter late on Friday that his client was abandoning the acquisition. Mr. Ringler alleged in his letter that Twitter breached its agreement with Mr. Musk by failing to provide him with detailed information about how it measures inauthentic accounts. He also said that Mr. Musk did not believe the metrics that Twitter had made public about how many of its users were fake.
Twitter’s board responded by saying it intended to go through with the acquisition and would sue Mr. Musk in Delaware’s chancery court to force him to do so.
At the heart of the dispute are the terms of the merger agreement Mr. Musk reached with Twitter in April. His contract with Twitter allows him to break the deal by paying a $1 billion fee, but only under certain circumstances, such as losing debt financing. The agreement also requires Twitter to provide any data Mr. Musk may require to complete the transaction.
Mr. Musk demanded that Twitter provide a detailed account of spam on its platform. In June, lawyers for Mr. Musk and Twitter argued over how much data to share to satisfy Mr. Musk’s requests.
Mr Musk’s cold feet on the Twitter deal have coincided with a huge decline in the valuations of technology companies, including Tesla, the electric vehicle company he runs, which is also his main source of wealth. Mr. Musk did not respond to a request for comment.
Twitter says its spam data is accurate, but has declined to publicly detail how it detects and counts spam accounts because it uses personal information, such as users’ phone numbers and other digital clues about their identity, to determine whether an account is inauthentic. A Twitter spokesman declined to comment on when Twitter plans to file a lawsuit to enforce the merger agreement.
“The results are: The court says Musk can go,” said David Larcker, a professor of accounting and corporate governance at Stanford University. “Another result is that he is forced to do the deal and the court can enforce it.” Or there could be some middle ground where there is a price renegotiation.”
For Twitter, completing a sale to Mr. Musk is vital. He struck a deal with Mr. Musk as technology companies enjoyed bullish valuations; some, like Snap and Meta, have now collapsed as they face advertising pressure, global economic upheaval and rising inflation. Twitter shares have fallen about 30% since the deal was announced and are trading well below Mr. Musk’s proposed price of $54.20 a share.
Legal experts said Mr. Musk’s argument about spam could be a ploy to force Twitter back to the negotiating table in hopes of securing a lower price.
At the time of the deal, no other potential buyer emerged as a white knight alternative to Mr. Musk, making his offer the best Twitter could get.
Twitter’s trump card is a “specific performance clause” that gives the company the right to sue Mr. Musk and force him to complete or pay for the deal, as long as the debt financing he made remains intact. Foreclosures have happened before: In 2001, Tyson Foods tried to walk away from acquiring meat processor IBP, citing IBP’s financial problems and accounting irregularities. A Delaware court vice chancellor ruled that Tyson must complete the acquisition,
But legal authority is different from practical reality. A lawsuit would likely cost millions in legal fees, take months to resolve and add further uncertainty to already nervous employees.
Disagreements over the deal often ended in settlements or price renegotiations. In 2020, luxury giant LVMH Moët Hennessy Louis Vuitton tried to scuttle its $16 billion deal to acquire Tiffany & Company, eventually securing a discount of about $420 million.
“This thing is a bargaining chip in an economic deal,” said Charles Elson, a recently retired professor of corporate governance at the University of Delaware. “It’s all about money.”
A lower price would benefit Mr. Musk and his financial backers, especially as Twitter faces financial difficulties. But Twitter has made it clear that it wants to force Mr. Musk to stick to its $44 billion offer.
The most damaging outcome for Twitter would be for the deal to fall through. Mr. Musk would have to prove that Twitter materially and willfully breached the terms of its contract, a high bar that acquirers have rarely met. Mr. Musk claims that Twitter is withholding the information he needs to close the deal. He also claims that Twitter misreported its spam data and that the misleading statistics masked a serious problem with Twitter’s business.
A buyer has only once successfully argued in a Delaware court that a material change in the target company’s business gave it an opportunity to exit the deal. This happened in 2017 with the $3.7 billion acquisition of pharmaceutical company Akorn by healthcare company Fresenius Kabi. After Fresenius signed the deal, Akorn’s profits fell and the company faced allegations from a whistleblower about circumventing regulatory requirements.
Even if Twitter shows it did not violate the merger agreement, the chancellor in a Delaware court could still allow Mr. Musk to pay damages and walk away, as in the case of Apollo Global Management’s deal to combine Huntsman chemical companies and Hexion in 2008.(The lawsuits closed in a botched $1 billion deal and settlement.)
Forcing an acquirer to buy a company is a complex process to oversee, and the chancellor may be reluctant to order the buyer to do something it does not ultimately follow through on, a risk that is particularly acute in this deal given that d -n Musk’s habit of ignoring legal restrictions.
“The worst-case scenario for the court is that he issues an order and he doesn’t comply, and they have to figure out what to do about it,” said Morgan Ricks, a professor at Vanderbilt Law School.
While Mr. Musk usually relies on a small circle of trusted individuals to run his business, which includes rocket maker SpaceX, he has brought in a larger legal team to oversee the Twitter acquisition. In addition to his personal attorney, Alex Spiro, he tapped attorneys from Skadden, Arps, Slate, Meagher & Flom.
Skadden is a preferred corporate law firm with extensive litigation experience in Delaware courts, including LVMH’s attempt to scuttle its acquisition of Tiffany.
For its part, Twitter has appointed lawyers from two firms, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to manage the deal. Wilson Sonsini is a longtime Twitter legal advisor who built his reputation on venture capital and technology deals. Simpson Thatcher is a New York-based law firm with more experience in general corporate mergers and acquisitions.
If Twitter renegotiates the acquisition price or accepts a split, it will likely face more legal problems. Shareholders will litigate both scenarios, adding to several shareholder lawsuits Twitter already faces over the acquisition. In April, financial analysts called Mr. Musk’s price a low offer, and Twitter shareholders may object if the company agrees to further reduce the acquisition price.
The split could also bring additional legal scrutiny to Mr. Musk. The Securities and Exchange Commission revealed in May that it was examining Mr. Musk’s purchases of Twitter stock and whether he properly disclosed his stake and intentions for the social media company. In 2018, the regulator secured a $40 million settlement from Mr. Musk and Tesla over allegations that his tweet, which falsely claimed he had secured financing to take Tesla private, constituted securities fraud.
“At the end of the day, the merger agreement is just a piece of paper. And a piece of paper can give you a lawsuit if your buyer cools off,” said Ronald Barush, a retired M&A lawyer who worked for Skadden Arps before it represented Mr. Musk. “A lawsuit doesn’t get you a deal. It usually causes a prolonged headache. And a damaged company.”
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