The mercurial Elon Musk finally made it official Friday: He declared in a regulatory filing that he no longer wants to go through with his $44 billion deal to buy Twitter Inc., a deal that the market has never really expected would happen.
The big question now is who has the best legal case when it comes to litigation that Twitter
Chairman Bret Taylor said the company will pursue, possibly in the form of a breach-of-contract suit. Experts told MarketWatch the Delaware Chancery Court will likely move fast to review any filings, which Twitter’s lawyers are likely working on this weekend, that will seek either the full $44 billion that Musk promised to pay or, at the very least, the $1 billion breakup fee.
“I assume they will try to get a preliminary injunction to force Musk to close by the specific performance clause in the contract,” said Stephen Diamond, an associate professor of law at Santa Clara University School of Law. “Barring that, they will demand $1 billion dollars in damages,” the reverse termination fee that the parties agreed to when they agreed to Musk’s $54.20-a-share offer in April.
Musk and his highly paid legal team at Skadden Arps will also possibly sue or countersue Twitter for breach of contract, experts said, after the team sent a letter to Twitter on Friday declaring his intention to terminate the deal.
“There also may be dueling lawsuits,” said Carl Tobias, the Williams professor of Law at the University of Richmond School of Law. “Twitter may file in Delaware, and Musk may want to file in Texas or California or wherever he thinks is more favorable.”
Musk’s lawyers, in their letter to Twitter’s Chief Legal Officer Vijaya Gadde, state that Twitter is in breach of two sections of the merger agreement, for not providing information requested since May 9. They cited five examples of information Twitter has failed to provide, with the biggest focus on Twitter’s calculation of “bot” and active-user accounts. As this column previously discussed, bots are a problem that Musk specifically said he wanted to fix in the press release announcing the merger, suggesting they are not something he learned about after signing the deal.
Few truly believe Musk is concerned about Twitter’s spam disclosures — this is an attempt to get Twitter to agree to a lower price, after stocks were slammed in the first half of this year and made an overpriced deal look even more expensive. Musk clearly had a good case of buyer’s remorse over the hefty price he offered for Twitter, as the overall price of Tesla Inc.
— which makes up a huge portion of his fortune — declined in the overall market downdraft.
Potentially realizing that the bot issue is a likely loser, Musk and his lawyers took a couple more swings in the letter. They claim that Twitter made staffing changes without Musk’s approval and said that he is “examining the company’s recent financial performance and revised outlook, and is considering whether the company’s declining business prospects and financial outlook” could lead to an out.
Diamond, who teaches on business law, securities law, corporate finance and corporate governance, said those arguments — that an acquisition target has had a dramatic change in its business since the merger agreement was signed — is not a likely winner in the court where the trial is likely to be held.
“Delaware is very skeptical of these kinds of arguments, they rarely succeed if ever,” he said.
One way out of this for Musk and Twitter is to strike a deal at a lower price, but that is unlikely to happen before they get to court. It is more likely, Diamond said, that they reach a deal after Twitter proves its case.
“It’s possible if Twitter gets the performance order, they will use it to close, but maybe at a slightly lower price,” Diamond said, referring to the court potentially ordering Musk to live up to the merger agreement.
Ultimately, though, the Twitter board and the company would be better off without Musk. Employees have never been happy about the notion of Musk taking over the company, taking it private and allowing Twitter to become a platform for freedom of speech “within the law.” The company has alreadylost some high profile engineers as a result of Musk’s looming deal.
Diamond said he believed the board never should have engaged with Musk at the level that they did.
“I feel that Twitter’s stakeholders — including people like me who use Twitter and shareholders — have a real beef with the CEO for getting into bed with this guy in the first place,” Diamond said. “He is not a reliable business partner. It’s not socially responsible capitalism.”
While that may be true, hindsight is of little use now. Responsible capitalism in the current situation requires Twitter to meet Musk in a courtroom and demand at least $1 billion, or as many billions as they can get out of him. It would be best for Twitter to not be run by Musk, but the company will need his money to move forward.