The Elon Musk-Twitter Saga Now Moves to the Courts & More News

 

Now that Elon Musk has signaled his intent to stroll away from his $44 billion provide to purchase Twitter, the destiny of the influential social media community might be decided by what could also be an epic court docket battle, involving months of costly litigation and high-stakes negotiations by elite legal professionals on either side.

The query is whether or not Mr. Musk might be legally compelled to stick along with his agreed-upon acquisition or be allowed to again out, presumably by paying a 10-figure penalty.

Most authorized specialists say Twitter has the higher hand, partially as a result of Mr. Musk hooked up few strings to his settlement to purchase the firm, and the firm is decided to drive the deal via.

But Mr. Musk revels in impulsiveness and brinkmanship and is backed by a fleet of prime bankers and legal professionals. Rather than participating in a protracted public brawl with the world’s richest man and his legions of die-hard followers, Twitter would possibly come underneath strain to discover a swift and comparatively peaceable decision — one that might protect the firm’s independence however go away it in a tenuous monetary place.

Mike Ringler, a associate at Skadden, Arps, Slate, Meagher & Flom who’s representing Mr. Musk, knowledgeable Twitter late on Friday that his shopper was abandoning the takeover. Mr. Ringler argued in his letter that Twitter had violated the settlement with Mr. Musk by not offering him with detailed details about the way it measures inauthentic accounts. He additionally mentioned that Mr. Musk didn’t consider the metrics that Twitter has publicly disclosed about what number of of its customers had been faux.

Twitter’s board responded by saying it supposed to consummate the acquisition and would sue Mr. Musk in a Delaware chancery court docket to drive him to achieve this.

At the coronary heart of the dispute are the phrases of the merger settlement that Mr. Musk reached with Twitter in April. His contract with Twitter permits him to break off his deal by paying a $1 billion payment, however solely underneath particular circumstances equivalent to dropping debt financing. The settlement additionally requires Twitter to present knowledge that Mr. Musk might require to full the transaction.

Mr. Musk has demanded that Twitter give an in depth accounting of the spam on its platform. Throughout June, legal professionals for Mr. Musk and Twitter have wrangled over how a lot knowledge to share to fulfill Mr. Musk’s inquiries.

Mr. Musk’s chilly ft about the Twitter deal coincided with an enormous slide in the valuation of expertise firms, together with Tesla, the electrical automobile firm he runs, which can also be his foremost supply of wealth. Mr. Musk didn’t reply to a request for remark.

Twitter maintains that its spam figures are correct, however has refused to publicly element the way it detects and counts spam accounts as a result of it makes use of non-public data, like customers’ cellphone numbers and different digital clues about their identities, to decide whether or not an account is inauthentic. A Twitter spokesman declined to touch upon when Twitter deliberate to sue to implement the merger settlement.

“The outcomes are: The court says Musk can walk away,” mentioned David Larcker, a professor of accounting and company 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, finishing a sale to Mr. Musk is important. It struck its cope with Mr. Musk as expertise firms had been having fun with optimistic valuations; some, like Snap and Meta, have now plummeted as they face promoting strain, world financial upheaval and rising inflation. Twitter’s inventory has fallen about 30 % since the deal was introduced, and trades effectively underneath the Mr. Musk’s providing value of $54.20 a share.

Legal specialists mentioned Mr. Musk’s dispute over spam may very well be a ploy to drive Twitter again to the bargaining desk in hopes of securing a lower cost.

During the deal-making, no different potential purchaser emerged as a white knight different to Mr. Musk, making his provide the greatest that Twitter is probably going to get.

Twitter’s trump card is a “specific performance clause” that provides the firm the proper to sue Mr. Musk and drive him to full or pay for the deal, as long as the debt financing he has corralled stays intact. Forced acquisitions have occurred earlier than: In 2001, Tyson Foods tried to again out of an acquisition of the meatpacker IBP, pointing to IBP’s monetary troubles and accounting irregularities. A Delaware court docket vice chancellor dominated that Tyson had to full the acquisition,

But authorized authority is completely different than sensible actuality. A lawsuit will in all probability price thousands and thousands in authorized charges, take months to resolve and add additional uncertainty to already jittery staff.

Deal disagreements have usually led to settlements or renegotiations on value. In 2020, luxurious large LVMH Moët Hennessy Louis Vuitton tried to break up its $16 billion deal to purchase Tiffany & Company, finally securing a reduction of about $420 million.

“This stuff is a bargaining move in an economic transaction,” mentioned Charles Elson, a lately retired professor of company governance at the University of Delaware. “It’s all about money.”

A lower cost would profit Mr. Musk and his monetary backers, particularly as Twitter faces monetary headwinds. But Twitter has made clear it desires to drive Mr. Musk to stick to his $44 billion provide.

The most damaging end result for Twitter could be for the deal to collapse. Mr. Musk would wish to present that Twitter materially and deliberately breached the phrases of its contract, a excessive bar that acquirers have hardly ever met. Mr. Musk has claimed that Twitter is withholding data essential for him to shut the deal. He has additionally argued that Twitter misreported its spam figures, and the deceptive statistics hid a significant issue with Twitter’s enterprise.

A purchaser has solely as soon as efficiently argued in a Delaware court docket {that a} materials change in the goal firm’s enterprise offers it the potential to cleanly exit the deal. That occurred in 2017 in the $3.7 billion acquisition of the pharmaceutical firm Akorn by the well being care firm Fresenius Kabi. After Fresenius signed the settlement, Akorn’s earnings fell and it confronted allegations by a whistle-blower of skirting regulatory necessities.

Even if Twitter reveals that it didn’t violate the merger settlement, a chancellor in the Delaware court docket should still enable Mr. Musk to pay damages and stroll away, as in the case of Apollo Global Management’s deal combining the chemical firms Huntsman and Hexion in 2008. (The lawsuits concluded in a damaged deal and a $1 billion settlement.)

Forcing an acquirer to purchase an organization is a sophisticated course of to oversee, and a chancellor might not need to order a purchaser to do one thing that he finally doesn’t comply with via on, a threat that’s notably acute on this deal, given Mr. Musk’s behavior of flouting authorized 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,” mentioned Morgan Ricks, a professor at Vanderbilt Law School.

While Mr. Musk sometimes depends on a small circle of confidants to run his companies, which embrace the rocket maker SpaceX, he has introduced in a bigger authorized crew to supervise the Twitter acquisition. In addition to his private lawyer, Alex Spiro, he tapped attorneys from Skadden, Arps, Slate, Meagher & Flom.

Skadden is a go-to company legislation agency, with ample expertise arguing instances in entrance of the Delaware court docket, together with LVMH’s try to break off its acquisition of Tiffany.

On its aspect, Twitter has deployed legal professionals from two companies, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to handle the deal. Wilson Sonsini is Twitter’s longtime authorized counsel, which constructed its status on offers in enterprise capital and expertise. Simpson Thatcher is a New York-based legislation agency with extra expertise typically company mergers and acquisitions.

If Twitter renegotiates its acquisition value or accepts a breakup, it is going to in all probability face extra authorized issues. Shareholders would sue over both situation, including to a number of shareholder lawsuits Twitter is already going through over the acquisition. In April, monetary analysts known as Mr. Musk’s value a lowball provide, and Twitter shareholders might balk if the firm agrees to additional scale back its acquisition value.

A breakup might additionally deliver added authorized scrutiny to Mr. Musk. The Securities and Exchange Commission revealed in May that it was inspecting Mr. Musk’s purchases of Twitter inventory and whether or not he correctly disclosed his stake and his intentions for the social media firm. In 2018, the regulator secured a $40 million settlement from Mr. Musk and Tesla over prices that his tweet falsely claiming he had secured funding to take Tesla non-public 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,” mentioned Ronald Barusch, a retired mergers and acquisitions lawyer who labored for Skadden Arps earlier than it represented Mr. Musk. “A lawsuit doesn’t give you a deal. It generally gives you a protracted headache. And a damaged company.”

 

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