The Elon Musk-Twitter Saga Now Moves to the Courts

Maria J. Smith

Now that Elon Musk has signaled his intent to stroll away from his $44 billion offer to purchase Twitter, the fate of the influential social media network will be decided by what may possibly be an epic courtroom battle, involving months of highly-priced litigation and high-stakes negotiations by elite legal professionals on equally sides.

The concern is no matter whether Mr. Musk will be legally compelled to stick with his agreed-on acquisition or be allowed to back again out, probably by paying out a 10-figure penalty.

Most legal experts say Twitter has the upper hand, in part since Mr. Musk connected couple of strings to his arrangement to get the organization, and the enterprise is identified to drive the offer by way of.

But Mr. Musk revels in impulsiveness and brinkmanship and is backed by a fleet of top bankers and legal professionals. Rather than partaking in a protracted general public brawl with the world’s richest male and his legions of die-tricky followers, Twitter could possibly occur under strain to locate a swift and somewhat peaceful resolution — just one that could protect the company’s independence but leave it in a tenuous economical placement.

Mike Ringler, a associate at Skadden, Arps, Slate, Meagher & Flom who is representing Mr. Musk, knowledgeable Twitter late on Friday that his client was abandoning the takeover. Mr. Ringler argued in his letter that Twitter experienced violated the agreement with Mr. Musk by not providing him with detailed information about how it actions inauthentic accounts. He also said that Mr. Musk did not think the metrics that Twitter has publicly disclosed about how numerous of its buyers were fake.

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

At the heart of the dispute are the phrases of the merger agreement that Mr. Musk achieved with Twitter in April. His agreement with Twitter will allow him to split off his offer by spending a $1 billion fee, but only less than distinct situation this sort of as shedding personal debt funding. The agreement also needs Twitter to deliver facts that Mr. Musk may possibly involve to entire the transaction.

Mr. Musk has demanded that Twitter give a detailed accounting of the spam on its platform. All over June, legal professionals for Mr. Musk and Twitter have wrangled about how a lot information to share to fulfill Mr. Musk’s inquiries.

Mr. Musk’s chilly ft about the Twitter offer coincided with a huge slide in the valuation of technological innovation corporations, like Tesla, the electric powered automobile enterprise he runs, which is also his most important resource of wealth. Mr. Musk did not reply to a ask for for remark.

Twitter maintains that its spam figures are precise, but has refused to publicly element how it detects and counts spam accounts mainly because it uses non-public facts, like users’ phone figures and other electronic clues about their identities, to establish no matter if an account is inauthentic. A Twitter spokesman declined to remark on when Twitter prepared to sue to enforce the merger settlement.

“The outcomes are: The courtroom suggests Musk can stroll away,” stated David Larcker, a professor of accounting and company governance at Stanford College. “Another result is that he is compelled to go by way of with the offer, and the court docket can implement this. Or there might be some center floor in which there is a price renegotiation.”

For Twitter, finishing a sale to Mr. Musk is critical. It struck its deal with Mr. Musk as technological innovation companies had been taking pleasure in optimistic valuations some, like Snap and Meta, have now plummeted as they face marketing tension, world financial upheaval and rising inflation. Twitter’s inventory has fallen about 30 per cent considering that the offer was announced, and trades effectively below the Mr. Musk’s supplying price of $54.20 a share.

Legal gurus said Mr. Musk’s dispute more than spam could be a ploy to pressure Twitter back to the bargaining desk in hopes of securing a lessen price.

In the course of the deal-earning, no other possible purchaser emerged as a white knight option to Mr. Musk, making his offer the greatest that Twitter is probable to get.

Twitter’s trump card is a “specific performance clause” that gives the corporation the suitable to sue Mr. Musk and force him to comprehensive or pay out for the deal, so lengthy as the credit card debt funding he has corralled continues to be intact. Compelled acquisitions have happened ahead of: In 2001, Tyson Foodstuff attempted to back again out of an acquisition of the meatpacker IBP, pointing to IBP’s economical troubles and accounting irregularities. A Delaware courtroom vice chancellor dominated that Tyson had to comprehensive the acquisition,

But legal authority is unique than practical truth. A lawsuit will likely price millions in authorized expenses, choose months to take care of and insert even more uncertainty to by now jittery workforce.

Deal disagreements have normally ended in settlements or renegotiations on cost. In 2020, luxurious huge LVMH Moët Hennessy Louis Vuitton attempted to crack up its $16 billion deal to acquire Tiffany & Firm, in the long run securing a discount of about $420 million.

“This things is a bargaining transfer in an financial transaction,” said Charles Elson, a recently retired professor of company governance at the College of Delaware. “It’s all about income.”

A decrease price tag would gain Mr. Musk and his economical backers, specifically as Twitter faces financial headwinds. But Twitter has designed apparent it would like to force Mr. Musk to stick to his $44 billion offer.

The most damaging end result for Twitter would be for the deal to collapse. Mr. Musk would need to have to present that Twitter materially and intentionally breached the phrases of its contract, a high bar that acquirers have almost never achieved. Mr. Musk has claimed that Twitter is withholding information essential for him to shut the deal. He has also argued that Twitter misreported its spam figures, and the misleading studies hid a critical difficulty with Twitter’s enterprise.

A buyer has only as soon as properly argued in a Delaware court docket that a material change in the concentrate on company’s company provides it the ability to cleanly exit the offer. That happened in 2017 in the $3.7 billion acquisition of the pharmaceutical enterprise Akorn by the overall health treatment corporation Fresenius Kabi. After Fresenius signed the agreement, Akorn’s earnings fell and it confronted allegations by a whistle-blower of skirting regulatory needs.

Even if Twitter
shows that it did not violate the merger settlement, a chancellor in the Delaware court may however enable Mr. Musk to pay back damages and stroll absent, as in the circumstance of Apollo Global Management’s deal combining the chemical companies Huntsman and Hexion in 2008. (The lawsuits concluded in a damaged deal and a $1 billion settlement.)

Forcing an acquirer to buy a corporation is a complicated process to oversee, and a chancellor may possibly not want to get a purchaser to do a thing that he eventually does not observe by on, a possibility that is specially acute in this offer, specified Mr. Musk’s practice of flouting lawful confines.

“The worst-situation situation for the courtroom is that it will make an get and that he does not comply, and they have to determine out what to do about it,” said Morgan Ricks, a professor at Vanderbilt Law College.

While Mr. Musk generally depends on a compact circle of confidants to run his corporations, which incorporate the rocket maker SpaceX, he has brought in a much larger authorized workforce to supervise the Twitter acquisition. In addition to his personal lawyer, Alex Spiro, he tapped lawyers from Skadden, Arps, Slate, Meagher & Flom.

Skadden is a go-to corporate legislation agency, with enough expertise arguing conditions in front of the Delaware court, which include LVMH’s attempt to crack off its acquisition of Tiffany.

On its aspect, Twitter has deployed lawyers from two firms, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to regulate the offer. Wilson Sonsini is Twitter’s longtime lawful counsel, which crafted its status on promotions in enterprise funds and technological know-how. Simpson Thacher is a New York-dependent regulation firm with extra encounter in general company mergers and acquisitions.

If Twitter renegotiates its acquisition rate or accepts a separation, it will almost certainly facial area a lot more lawful troubles. Shareholders would sue around possibly circumstance, introducing to quite a few shareholder lawsuits Twitter is previously facing in excess of the acquisition. In April, financial analysts termed Mr. Musk’s value a lowball present, and Twitter shareholders could balk if the business agrees to even more lessen its acquisition selling price.

A break up could also deliver additional authorized scrutiny to Mr. Musk. The Securities and Exchange Commission disclosed in May possibly that it was examining Mr. Musk’s purchases of Twitter inventory and irrespective of whether he thoroughly disclosed his stake and his intentions for the social media corporation. In 2018, the regulator secured a $40 million settlement from Mr. Musk and Tesla in excess of fees that his tweet falsely professing he experienced secured funding to get Tesla private amounted to securities fraud.

“At the conclusion 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 purchaser gets cold toes,” stated Ronald Barusch, a retired mergers and acquisitions law firm who worked for Skadden Arps just before it represented Mr. Musk. “A lawsuit doesn’t give you a deal. It typically offers you a protracted headache. And a harmed company.”

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