Elon Musk notified Twitter on Friday that he was walking away from an agreed $44bn (£36.6bn) takeover. The move sets the stage for a legal battle between the world’s richest man and the social media platform. Here we explain what happens next, and whether Musk has a chance of succeeding.
Why is Musk walking away?
The core of Musk’s case centres on his belief that the number of spam bot accounts on Twitter’s platform is much higher than the company’s assertion of fewer than 5% of its daily active users.
The letter from lawyers for Musk, whose shares in his electric car business, Tesla, were going to help fund the deal, argues that under-representing the number of spam accounts on the platform – something Twitter denies – constitutes a “company material adverse effect”, which effectively means something is seriously wrong at the business and it is worth nowhere near the $54.20 a share agreed on.
How strong is Musk’s case?
The merger agreement contains a clause (6.4) stating that Twitter must provide Musk with all data and information that the multibillionaire requests “for any reasonable business purpose related to the consummation of the transaction”. This is a covenant in the deal – a promise to act in a certain way during the sale process – and a breach of it would allow Musk to walk away without sanction.
But legal experts have questioned whether failure to provide more than has already been shared by Twitter regarding its bot count would breach the covenant. The agreement uses the word “reasonable” a lot when laying out what information requests are acceptable.
“The agreement doesn’t give him the right to receive any information, for any reason,” said Brian Quinn, an associate professor at Boston College law school. “He is going to bear a burden of proving to the court that he had legitimate need for the information and that his requests were reasonable. He can’t use unreasonable information requests to create a pretext to claim a violation.”
Quinn describes the material adverse effect clause as “basically a nonstarter”. “His letter basically admits as much: it says they are still figuring [the alleged spam problem] out. It’s not strong and will fail.”
Does Musk have any other legal arguments?
His lawyers also argue Twitter broke the merger agreement by failing to seek Musk’s consent when it fired two executives and laid off a third of its talent acquisition team (or HR department). This might seem a narrow basis for terminating a deal, but the agreement states (clause 6.1) that Musk must be told when Twitter is deviating from its obligation to conduct its business in the ordinary course and must “preserve substantially intact the material components of its current business organisation.”
Quinn believes this argument has some weight and the court will look at it. But, he added, “my guess here is that the court will likely decide that these firings are more like ordinary business than not”.
Alternatively, Musk could try to go down the financing route. The specific performance clause (9.9) requires that the debt financing underpinning a substantial chunk of the deal “has been funded or will be funded at the closing”. However, the banks’ $13bn funding commitment is also covered by a legal agreement, so Twitter can be expected to consider its legal options if Musk’s banks try to pull out.
What are Twitter’s options?
The Twitter chair, Bret Taylor, said on Friday the company would “pursue legal action to enforce the merger agreement”. If he does, the case will be heard in Delaware, the US state that has jurisdiction over the deal.
The Twitter Board is committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plans to pursue legal action to enforce the merger agreement. We are confident we will prevail in the Delaware Court of Chancery.
— Bret Taylor (@btaylor) July 8, 2022
Quinn said he expected Twitter to file for a declaratory judgment that it was not in violation of the agreement and that Musk could not just walk away.
Experts also expect Twitter to seek an order from the court that Musk specifically perform his obligations under the agreement – in other words that he buy the company. This is known as “specific performance.”
John Coffee, a professor of law at Columbia University, said: “They will sue in Delaware’s chancery court for specific performance. That is, asking for an order compelling Musk and his affiliates to close the deal at the original price.”
The company also has the option of seeking a $1bn break fee from Musk as per the agreement, instead of forcing him to buy it.
Is a settlement possible?
If Twitter wins its case, it could be forcing the world’s richest man to buy a business he doesn’t want.
“Most similar disputes usually conclude with settlements that permit plaintiffs and defendants to save face,” said Carl Tobias, Williams chair in law at the University of Richmond.
There is also the possibility that if Musk finds he still wants to own Twitter, but is worried about overpaying, both sides agree a lower price. However, Twitter’s institutional shareholders may push back against that.
“I doubt that the court will get to rule before there is a settlement, and the day to day price of Twitter will give you some idea of what Musk’s side will hope to pay,” said Coffee. Twitter’s shares are currently trading at less than $37, valuing the company at $28bn.
