Most lawyers agree that Twitter is in a better position. But Musk loves living on the edge.
Now that Elon Musk has said he won’t go through with his $44 billion offer to buy Twitter, the fate of the influential social media network will be decided by what could be an epic court battle involving months of expensive litigation and high-stakes negotiations by the best lawyers on both sides.
The question is whether Mr. Musk will be forced by the law to go through with the purchase he agreed to or if he will be able to back out, possibly by paying a 10-figure fine.
Most lawyers say Twitter has the upper hand. This is because Mr. Musk’s agreement to buy the company didn’t come with many conditions, and Twitter is determined to make the deal happen.
But Mr. Musk likes to act quickly and push things to the edge. He also has a team of top bankers and lawyers backing him up. Instead of getting into a long, public fight with the world’s richest man and his millions of devoted fans, Twitter might be forced to find a quick, relatively peaceful solution that would keep the company’s independence but leave it in a precarious financial position.
Mike Ringler, a partner at Skadden, Arps, Slate, Meagher & Flom who represents Mr. Musk, said on Twitter late Friday night that his client was giving up on the takeover. In his letter, Mr. Ringler said that Twitter had broken its contract with Mr. Musk by not giving him more information about how it finds fake accounts. He also said that Mr. Musk didn’t think that the numbers Twitter has made public about how many users it has were made up.
Twitter’s board replied that it planned to go through with the purchase and would sue Mr. Musk in a Delaware chancery court to make him do so.
At the heart of the fight are the terms of the deal Mr. Musk made with Twitter in April to merge the two companies. He can get out of his deal with Twitter if he pays a $1 billion fee, but only in certain situations, like if he loses his debt financing. The agreement also says that Twitter has to give Mr. Musk any information he may need to finish the deal.
Mr. Musk has asked Twitter for a full report on how much spam is on its platform. During the whole month of June, lawyers for Mr. Musk and Twitter have been arguing about how much information to give Mr. Musk to answer his questions.
Mr. Musk’s doubts about the Twitter deal came at the same time as a huge drop in the value of technology companies, including the company he runs, Tesla, which makes electric cars and is his main source of wealth. Mr. Musk didn’t answer when asked for a comment.
Twitter says that its spam numbers are correct, but it won’t say how it finds and counts spam accounts because it uses private information, like a user’s phone number and other digital clues about who they are, to figure out if an account is fake. A Twitter spokesman wouldn’t say when Twitter was going to sue to make sure the merger agreement was followed.
David Larcker, a professor of accounting and corporate governance at Stanford University, said, “The court says Musk can walk away.” “Another thing that could happen is that he is forced to keep the deal, and the court can make this happen. Or there might be a middle ground where the price is renegotiated. It is very important for Twitter to sell to Mr. Musk. It made a deal with Mr. Musk when tech companies had high valuations. Some, like Snap and Meta, have since lost a lot of value because of pressure from advertisers, changes in the global economy, and rising inflation. Since the deal was announced, Twitter’s stock has dropped about 30%, and it now trades well below Mr. Musk’s offer price of $54.20 per share.
Experts in the law said that Mr. Musk’s fight with Twitter over spam could be a plan to get Twitter back to the negotiating table so he can get a lower price.
During the negotiations, no other potential buyer stepped up to be Mr. Musk’s white knight, so his offer is probably the best that Twitter will get.
Twitter’s ace in the hole is a “specific performance clause” that lets the company sue Mr. Musk and force him to finish the deal or pay for it, as long as the debt financing he has gathered stays in place. There have been forced acquisitions in the past: In 2001, Tyson Foods tried to back out of a deal to buy the meatpacker IBP, citing IBP’s financial problems and accounting mistakes. The vice chancellor of a Delaware court said that Tyson had to go through with the purchase, but what the law says and what actually happens are two different things. A lawsuit will likely cost millions of dollars in legal fees, take months to settle, and make employees even more nervous than they already are.
When people disagree about a deal, they often settle or re-negotiate the price. In 2020, luxury goods giant LVMH Mot Hennessy Louis Vuitton tried to break up its $16 billion deal to buy Tiffany & Company. In the end, it was able to get a $420 million discount on the deal.
“This is a way to bargain in a business deal,” said Charles Elson, a professor of corporate governance at the University of Delaware who just retired. “Money is everything.”
A lower price would help Mr. Musk and his investors, especially since Twitter is having trouble making money right now. But Twitter has made it clear that it wants Mr. Musk to keep his offer of $44 billion.
The worst thing for Twitter would be if the deal fell through. Mr. Musk would have to show that Twitter broke its contract terms in a way that was both important and deliberate. This is a high bar that acquirers rarely clear. Mr. Musk says that Twitter is not giving him the information he needs to close the deal. He has also said that Twitter lied about how much spam it had, and that this hid a serious problem with the way Twitter did business.
Only once has a buyer been able to convince a Delaware court that a material change in the business of the target company gives it a clean way out of the deal. This happened in 2017 when the health care company Fresenius Kabi bought the drug company Akorn for $3.7 billion. After Fresenius signed the agreement, Akorn’s earnings went down, and a whistleblower accused it of not following the rules.
Even if Twitter can prove that it didn’t break the merger agreement, a chancellor in the Delaware court could still let Mr. Musk pay damages and walk away, as happened when Apollo Global Management merged the chemical companies Huntsman and Hexion in 2008. (The lawsuits ended with a broken deal and a settlement of $1 billion.)
Forcing an acquirer to buy a company is a complicated process, and a chancellor may not want to order a buyer to do something he doesn’t end up doing. This is a risk that is especially high in this deal, since Mr. Musk is known for ignoring the law.
Morgan Ricks, a professor at Vanderbilt Law School, said, “The worst-case scenario for the court is that it makes an order and he doesn’t follow it. Then they have to figure out what to do.”
Mr. Musk usually relies on a small group of trusted people to run his businesses, such as the rocket company SpaceX. But for the Twitter acquisition, he has brought in a larger legal team. He used lawyers from Skadden, Arps, Slate, Meagher & Flom as well as his own lawyer, Alex Spiro.
Skadden is a well-known business law firm that has a lot of experience arguing cases in front of the Delaware court, like when LVMH tried to stop its purchase of Tiffany.
Twitter’s side of the deal is being handled by lawyers from two firms, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett. Wilson Sonsini has been Twitter’s lawyer for a long time. The firm made its name by doing deals in venture capital and technology. Simpson Thacher is a law firm in New York that has more experience with mergers and acquisitions in general.
If Twitter renegotiates the price of its acquisition or agrees to a breakup, it will probably have to deal with more legal issues. Shareholders would sue in either case, adding to the lawsuits they have already filed against Twitter over the acquisition. In April, financial experts said that Mr. Musk’s price was too low, and Twitter shareholders could be upset if the company agrees to lower its acquisition price even more.
If they break up, Mr. Musk could also get more attention from the law. In May, the Securities and Exchange Commission said it was looking into Mr. Musk’s purchases of Twitter stock to see if he properly disclosed his stake and what he planned to do with the social media company. In 2018, the regulator got Mr. Musk and Tesla to pay $40 million to settle charges that his tweet falsely saying he had funding to take Tesla private was a form of securities fraud.
“A merger agreement is just a piece of paper at the end of the day. And a piece of paper can give you a lawsuit if your buyer changes their mind,” said Ronald Barusch, a retired mergers and acquisitions lawyer who worked for Skadden Arps before it represented Mr. Musk. “A lawsuit doesn’t give you a deal. It usually gives you a headache that lasts for a long time. And a hurt business.”