What’s Next in the Elon Musk-Twitter Saga? A Court Battle

Now that Elon Musk has signaled his intent to walk absent from his $44 billion give to obtain Twitter, the destiny of the influential social media community will be determined by what may be an epic court struggle, involving months of pricey litigation and higher-stakes negotiations by elite attorneys on equally sides.

The issue is no matter whether Mr. Musk will be legally compelled to adhere with his agreed-on acquisition or be authorized to again out, possibly by paying a 10-figure penalty.

Most legal industry experts say Twitter has the higher hand, in section mainly because Mr. Musk attached couple strings to his agreement to obtain the business, and the organization is determined to power the deal by.

But Mr. Musk revels in impulsiveness and brinkmanship and is backed by a fleet of top rated bankers and attorneys. Relatively than participating in a protracted general public brawl with the world’s richest guy and his legions of die-tricky followers, Twitter might come beneath force to find a swift and relatively peaceful resolution — a person that could protect the company’s independence but depart it in a tenuous economic position.

Mike Ringler, a spouse at Skadden, Arps, Slate, Meagher & Flom who is symbolizing Mr. Musk, educated 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 delivering him with specific information and facts about how it actions inauthentic accounts. He also explained that Mr. Musk did not believe the metrics that Twitter has publicly disclosed about how a lot of of its people were being bogus.

Twitter’s board responded by expressing it meant to consummate the acquisition and would sue Mr. Musk in a Delaware chancery court to force him to do so.

At the coronary heart of the dispute are the terms of the merger settlement that Mr. Musk attained with Twitter in April. His agreement with Twitter allows him to break off his offer by paying a $1 billion payment, but only underneath particular situations this sort of as shedding financial debt funding. The arrangement also involves Twitter to provide information that Mr. Musk may demand to finish the transaction.

Mr. Musk has demanded that Twitter give a thorough accounting of the spam on its platform. In the course of June, legal professionals for Mr. Musk and Twitter have wrangled in excess of how a great deal knowledge to share to fulfill Mr. Musk’s inquiries.

Mr. Musk’s chilly toes about the Twitter offer coincided with a huge slide in the valuation of technological innovation corporations, which include Tesla, the electrical car enterprise he runs, which is also his key source of prosperity. Mr. Musk did not react to a request for comment.

Twitter maintains that its spam figures are exact, but has refused to publicly element how it detects and counts spam accounts mainly because it employs non-public information, like users’ cellular phone quantities and other digital clues about their identities, to ascertain no matter whether an account is inauthentic. A Twitter spokesman declined to remark on when Twitter planned to sue to enforce the merger arrangement.

“The results are: The court says Musk can wander away,” said David Larcker, a professor of accounting and corporate governance at Stanford University. “Another result is that he is compelled to go as a result of with the deal, and the courtroom can implement this. Or there may well be some center ground wherever there’s a selling price renegotiation.”

For Twitter, completing a sale to Mr. Musk is critical. It struck its offer with Mr. Musk as technologies firms were being savoring optimistic valuations some, like Snap and Meta, have now plummeted as they face promoting force, global financial upheaval and mounting inflation. Twitter’s stock has fallen about 30 per cent due to the fact the offer was introduced, and trades effectively below the Mr. Musk’s offering value of $54.20 a share.

Legal industry experts explained Mr. Musk’s dispute about spam could be a ploy to force Twitter again to the bargaining table in hopes of securing a lower cost.

Throughout the offer-creating, no other potential customer emerged as a white knight choice to Mr. Musk, earning his present the greatest that Twitter is probable to get.

Twitter’s trump card is a “specific general performance clause” that offers the corporation the suitable to sue Mr. Musk and pressure him to entire or pay for the offer, so very long as the personal debt funding he has corralled remains intact. Forced acquisitions have transpired ahead of: In 2001, Tyson Foodstuff experimented with to back out of an acquisition of the meatpacker IBP, pointing to IBP’s money difficulties and accounting irregularities. A Delaware court vice chancellor dominated that Tyson had to complete the acquisition,

But lawful authority is unique than sensible reality. A lawsuit will possibly price millions in authorized service fees, get months to solve and increase more uncertainty to now jittery personnel.

Offer disagreements have usually finished in settlements or renegotiations on rate. In 2020, luxury giant LVMH Moët Hennessy Louis Vuitton attempted to crack up its $16 billion deal to acquire Tiffany & Corporation, in the end securing a lower price of about $420 million.

“This things is a bargaining move in an economic transaction,” mentioned Charles Elson, a recently retired professor of company governance at the University of Delaware. “It’s all about income.”

A lower selling price would reward Mr. Musk and his economic backers, primarily as Twitter faces monetary headwinds. But Twitter has produced clear it needs to drive Mr. Musk to stick to his $44 billion provide.

The most harming end result for Twitter would be for the deal to collapse. Mr. Musk would have to have to demonstrate that Twitter materially and intentionally breached the terms of its deal, a higher bar that acquirers have rarely satisfied. Mr. Musk has claimed that Twitter is withholding info important for him to near the deal. He has also argued that Twitter misreported its spam figures, and the misleading studies hid a really serious difficulty with Twitter’s organization.

A purchaser has only at the time correctly argued in a Delaware courtroom that a content modify in the goal company’s enterprise presents it the skill to cleanly exit the offer. That occurred in 2017 in the $3.7 billion acquisition of the pharmaceutical organization Akorn by the overall health treatment enterprise Fresenius Kabi. After Fresenius signed the arrangement, Akorn’s earnings fell and it faced allegations by a whistle-blower of skirting regulatory prerequisites.

Even if Twitter displays that it did not violate the merger settlement, a chancellor in the Delaware courtroom may perhaps nonetheless permit Mr. Musk to spend damages and stroll away, as in the circumstance of Apollo World-wide Management’s offer combining the chemical businesses Huntsman and Hexion in 2008. (The lawsuits concluded in a damaged offer and a $1 billion settlement.)

Forcing an acquirer to obtain a business is a challenging procedure to oversee, and a chancellor may perhaps not want to purchase a consumer to do one thing that he in the end does not comply with via on, a hazard that is specifically acute in this deal, specified Mr. Musk’s pattern of flouting authorized confines.

“The worst-situation situation for the court is that it helps make an purchase and that he does not comply, and they have to figure out what to do about it,” mentioned Morgan Ricks, a professor at Vanderbilt Legislation School.

Even though Mr. Musk ordinarily relies on a compact circle of confidants to operate his businesses, which contain the rocket maker SpaceX, he has brought in a much larger lawful team to supervise the Twitter acquisition. In addition to his personal attorney, Alex Spiro, he tapped attorneys from Skadden, Arps, Slate, Meagher & Flom.

Skadden is a go-to company law firm, with ample practical experience arguing cases in entrance of the Delaware court docket, which includes LVMH’s try to split off its acquisition of Tiffany.

On its facet, Twitter has deployed lawyers from two corporations, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to control the deal. Wilson Sonsini is Twitter’s longtime legal counsel, which built its name on deals in undertaking funds and technological innovation. Simpson Thacher is a New York-based mostly law firm with additional working experience in typical company mergers and acquisitions.

If Twitter renegotiates its acquisition rate or accepts a break up, it will in all probability facial area far more authorized issues. Shareholders would sue over possibly state of affairs, introducing to several shareholder lawsuits Twitter is currently dealing with over the acquisition. In April, financial analysts referred to as Mr. Musk’s cost a lowball provide, and Twitter shareholders could balk if the corporation agrees to further lower its acquisition cost.

A separation could also carry additional authorized scrutiny to Mr. Musk. The Securities and Trade Fee revealed in Might that it was examining Mr. Musk’s purchases of Twitter stock and no matter whether he correctly disclosed his stake and his intentions for the social media enterprise. 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 acquire Tesla private amounted to securities fraud.

“At the finish of the working day, a merger arrangement is just a piece of paper. And a piece of paper can give you a lawsuit if your customer receives cold toes,” claimed Ronald Barusch, a retired mergers and acquisitions lawyer who labored for Skadden Arps right before it represented Mr. Musk. “A lawsuit doesn’t give you a offer. It generally presents you a protracted headache. And a damaged firm.”