How the Elon Musk-Twitter deal might play out in court

Elon Musk has moved to end his deal to buy Twitter. But the company is determined to force the deal through. Photo / AP

Most legal experts say Twitter has the upper hand. But Musk revels in brinkmanship.

Now that Elon Musk has signalled his intent to walk away from his US$44 billion ($71 billion) offer to buy Twitter, the fate of the influential social media network will be determined by what may be an epic court battle, involving months of expensive litigation and high-stakes negotiations by elite lawyers on both sides.

The question is whether Musk will be legally compelled to stick with his agreed-upon acquisition or be allowed to back out, possibly by paying a 10-figure penalty.

Most legal experts say Twitter has the upper hand, in part because Musk attached few strings to his agreement to buy the company, and the company is determined to force the deal through.

But Musk revels in impulsiveness and brinkmanship and is backed by a fleet of top bankers and lawyers. Rather than engaging in a protracted public brawl with the world's richest man and his legions of die-hard followers, Twitter might come under pressure to find a swift and relatively peaceful resolution — one that could preserve the company's independence but leave it in a tenuous financial position.

Mike Ringler, a partner at Skadden, Arps, Slate, Meagher & Flom who is representing Musk, informed Twitter late Friday that his client was abandoning the takeover. Ringler argued in his letter that Twitter had violated the agreement with Musk by not providing him with detailed information about how it measures inauthentic accounts. He also said that Musk did not believe the metrics that Twitter has publicly disclosed about how many of its users were fake.

Twitter's board responded by saying it intended to consummate the acquisition and would sue Musk in a Delaware chancery court to force him to do so.

At the heart of the dispute are the terms of the merger agreement that Musk reached with Twitter in April. His contract with Twitter allows him to break off his deal by paying a US$1 billion fee, but only under specific circumstances such as losing debt financing. The agreement also requires Twitter to provide data that Musk may require to complete the transaction.

Musk has demanded that Twitter give a detailed accounting of the spam on its platform. Throughout June, lawyers for Musk and Twitter have wrangled over how much data to share to satisfy Musk's inquiries.

Musk's cold feet about the Twitter deal coincided with a huge slide in the valuation of technology companies, including Tesla, the electric vehicle company he runs, which is also his main source of wealth. Musk did not respond to a request for comment.

Twitter maintains that its spam figures are accurate, but has refused to publicly detail how it detects and counts spam accounts because it uses private information, like users' phone numbers and other digital clues about their identities, to determine whether an account is inauthentic. A Twitter spokesperson declined to comment on when Twitter planned to sue to enforce the merger agreement.

"The outcomes are: The court says Musk can walk away," said David Larcker, a professor of accounting and corporate governance at Stanford University. "Another outcome is that he is forced to go through with the deal, and the court can enforce this. Or there might be some middle ground where there's a price renegotiation."

For Twitter, completing a sale to Musk is vital. It struck its deal with Musk as technology companies were enjoying optimistic valuations; some, like Snap and Meta, have now plummeted as they face advertising pressure, global economic upheaval and rising inflation. Twitter's stock has fallen about 30 per cent since the deal was announced and trades well under Musk's offering price of US$54.20 a share.

Legal experts said Musk's dispute over spam could be a ploy to force Twitter back to the bargaining table in hopes of securing a lower price.

During the deal-making, no other potential buyer emerged as a white knight alternative to Musk, making his offer the best that Twitter is likely to get.

Twitter's trump card is a "specific performance clause" that gives the company the right to sue Musk and force him to complete or pay for the deal, so long as the debt financing he has corralled remains intact. Forced acquisitions have happened before: In 2001, Tyson Foods tried to back out of an acquisition of meatpacker IBP, pointing to IBP's financial troubles and accounting irregularities. A Delaware court vice chancellor ruled that Tyson had to complete the acquisition.

But legal authority is different from practical reality. A lawsuit will probably cost millions in legal fees, take months to resolve and add further uncertainty to already jittery employees.

Deal disagreements have often ended in settlements or renegotiations on price. In 2020, luxury giant LVMH Moët Hennessy Louis Vuitton attempted to break up its US$16 billion deal to acquire Tiffany & Co., ultimately securing a discount of about US$420 million.

"This stuff is a bargaining move in an economic transaction," 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 Musk and his financial backers, especially as Twitter faces financial headwinds. But Twitter has made clear that it wants to force Musk to stick to his US$44 billion offer.

The most damaging outcome for Twitter would be for the deal to collapse. Musk would need to show that Twitter materially and intentionally breached the terms of its contract, a high bar that acquirers have rarely met. Musk has said that Twitter is withholding information necessary for him to close the deal. He has also argued that Twitter misreported its spam figures, and the misleading statistics concealed 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 gives it the ability to cleanly exit the deal. That occurred in 2017 in the US$3.7 billion acquisition of pharmaceutical company Akorn by health care company Fresenius Kabi. After Fresenius signed the agreement, Akorn's earnings fell and it faced allegations by a whistleblower of skirting regulatory requirements.

Even if Twitter shows that it did not violate the merger agreement, a chancellor in the Delaware court may still allow Musk to pay damages and walk away, as in the case of Apollo Global Management's deal combining chemical companies Huntsman and Hexion in 2008. (The lawsuits concluded in a broken deal and a US$1 billion settlement.)

Forcing an acquirer to buy a company is a complicated process to oversee, and a chancellor may not want to order a buyer to do something that he ultimately does not follow through on, a risk that is particularly acute in this deal, given Musk's habit of flouting legal confines.

"The worst-case scenario for the court is that it makes an order and that 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 Musk typically relies on a small circle of confidants to run his businesses, which include rocket maker SpaceX, he has brought in a larger legal team to supervise the Twitter acquisition. In addition to his personal lawyer, Alex Spiro, he tapped attorneys from Skadden, Arps, Slate, Meagher & Flom.

Skadden is a go-to corporate law firm, with ample experience arguing cases in front of the Delaware court, including LVMH's attempt to break off its acquisition of Tiffany.

On its side, Twitter has deployed lawyers from two firms, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to manage the deal. Wilson Sonsini is Twitter's longtime legal counsel, which built its reputation on deals in venture capital and technology. Simpson Thacher is a New York-based law firm with more experience in general corporate mergers and acquisitions.

If Twitter renegotiates its acquisition price or accepts a breakup, it will probably face more legal problems. Shareholders would sue over either scenario, adding to several shareholder lawsuits Twitter is already facing over the acquisition. In April, financial analysts called Musk's price a lowball offer, and Twitter shareholders could balk if the company agrees to further reduce its acquisition price.

A breakup could also bring added legal scrutiny to Musk. The Securities and Exchange Commission revealed in May that it was examining Musk's purchases of Twitter stock and whether he properly disclosed his stake and his intentions for the social media company.

In 2018, the regulator secured a US$40 million settlement from Musk and Tesla over charges that his tweet falsely claiming he had secured funding to take Tesla private amounted to securities fraud.

"At the end of the day, a merger agreement is just a piece of paper. And a piece of paper can give you a lawsuit if your buyer gets cold feet," said Ronald Barusch, a retired mergers and acquisitions lawyer who worked for Skadden Arps before it represented Musk. "A lawsuit doesn't give you a deal. It generally gives you a protracted headache. And a damaged company."

This article originally appeared in The New York Times.

Written by: Lauren Hirsch and Kate Conger
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