The Elon Musk-Twitter Saga Now Moves to the Courts

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 legal professionals on each side.

The query is whether or not Mr. Musk will probably be legally compelled to stay along with his agreed-upon acquisition or be allowed to again out, presumably by paying a 10-figure penalty.

Most authorized specialists say Twitter has the higher hand, partially as a result of Mr. Musk connected few strings to his settlement to purchase the corporate, and the corporate is decided to drive the deal by way of.

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

Mike Ringler, a companion 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 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 meant to consummate the acquisition and would sue Mr. Musk in a Delaware chancery courtroom to drive 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 charge, however solely underneath particular circumstances comparable to dropping debt financing. The settlement additionally requires Twitter to offer knowledge that Mr. Musk might 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, legal professionals 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 in regards to the Twitter deal coincided with an enormous slide within the valuation of know-how firms, together with Tesla, the electrical automobile firm he runs, which can be his most important 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 personal 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,” stated David Larcker, a professor of accounting and company governance at Stanford College. “One other end result 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 significant. It struck its take care of Mr. Musk as know-how firms have 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 % because the deal was introduced, and trades nicely underneath the Mr. Musk’s providing value of $54.20 a share.

Authorized specialists stated Mr. Musk’s dispute over spam may very well be a ploy to drive Twitter again to the bargaining desk in hopes of securing a lower cost.

In the course of the deal-making, no different potential purchaser emerged as a white knight various to Mr. Musk, making his supply the perfect that Twitter is more likely to get.

Twitter’s trump card is a “particular efficiency clause” that offers the corporate the correct to sue Mr. Musk and drive him to finish or pay for the deal, as long as the debt financing he has corralled stays intact. Compelled 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 totally different than sensible actuality. A lawsuit will most likely value tens of millions 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 value. In 2020, luxurious large LVMH Moët Hennessy Louis Vuitton tried to interrupt up its $16 billion deal to amass Tiffany & Firm, finally securing a reduction of about $420 million.

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

A lower cost would profit Mr. Musk and his monetary backers, particularly as Twitter faces monetary headwinds. However Twitter has made clear it desires to drive Mr. Musk to stay to his $44 billion supply.

Probably the most damaging end result for Twitter could be for the deal to break down. Mr. Musk would want to indicate 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 obligatory 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 offers 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.

Ev
en when Twitter exhibits that it didn’t violate the merger settlement, a chancellor within the Delaware courtroom should still enable Mr. Musk to pay damages and stroll away, as within the case of Apollo World 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 an advanced course of to supervise, and a chancellor might not need to order a purchaser to do one thing that he finally doesn’t observe by way of on, a danger 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,” stated Morgan Ricks, a professor at Vanderbilt Legislation Faculty.

Whereas Mr. Musk usually depends on a small circle of confidants to run his companies, which embody the rocket maker SpaceX, he has introduced in a bigger authorized workforce 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 regulation 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 aspect, Twitter has deployed legal professionals 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 know-how. Simpson Thacher is a New York-based regulation agency with extra expertise basically company mergers and acquisitions.

If Twitter renegotiates its acquisition value or accepts a breakup, it’ll 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 value a lowball supply, and Twitter shareholders might balk if the corporate agrees to additional scale back its acquisition value.

A breakup might additionally convey added authorized scrutiny to Mr. Musk. The Securities and Alternate 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 prices that his tweet falsely claiming he had secured funding to take Tesla personal amounted to securities fraud.

“On the finish of the day, a merger settlement is only a piece of paper. And a bit of paper can provide you a lawsuit in case your purchaser will get chilly ft,” stated Ronald Barusch, a retired mergers and acquisitions lawyer who labored for Skadden Arps earlier than it represented Mr. Musk. “A lawsuit doesn’t provide you with a deal. It typically offers you a protracted headache. And a broken firm.”

Elon Musk Moves to End $44 Billion Deal to Buy Twitter

Owning Twitter is tricky because the platform faces regulatory scrutiny and is embroiled in a debate over free speech online. Its business has also faced difficulties, especially in a competitive market for digital advertising. After Mr. Musk struck the acquisition agreement, Twitter reported 16 percent growth in revenue for the first quarter, below the 20 percent it had predicted.

Within weeks, Mr. Musk tweeted that the deal was on hold, saying he wanted more details about the volume of spam and fake accounts. At one point, he said striking a deal for Twitter at a lower price was “not out of the question.” He also responded to tweets from Parag Agrawal, Twitter’s chief executive, who posted details of how the company detects and fights spam, with a poop emoji.

Behind the scenes, Twitter continued giving Mr. Musk and his team access to information about its platform, people with knowledge of the situation have said. Last month, the company agreed to allow Mr. Musk direct access to its “firehose,” the daily stream of millions of tweets that flow through the company’s network. Twitter, which has said roughly 5 percent of its accounts are spam since it went public in 2013, has also said the number is an estimate.

Even so, the number of fake accounts remained a concern for Mr. Musk. For years before proposing the acquisition, he complained about spam on Twitter and said the company should do more to authenticate its users. In 2020, he appeared at a Twitter employee event and said the company should do more to prevent spam.

Last month, in a six-paragraph letter, Mr. Musk’s lawyers demanded more information from Twitter about its methods for counting fake accounts and claimed the firm was “actively resisting and thwarting” his rights. The company was “refusing Mr. Musk’s data requests” to disclose the number of fake accounts on its platform, they said. That amounted to a “clear material breach” of the deal, the lawyers continued, saying it gave Mr. Musk the right to break off the agreement.

Twitter said on Thursday that it had heightened efforts to detect and block spam after Russia used fake accounts to influence the 2016 U.S. presidential election. The company has added new requirements to its sign-up process and said it used human auditors to vet its tally of spam accounts. It also said it removed one million spam accounts each day, and locked millions more per week until the operators of the accounts passed anti-spam tests.