Now that Elon Musk has signaled his intent to walk away from his $44 billion offer to buy Twitter, the destiny of the influential social media community will likely be decided by what could also be an epic courtroom battle, involving months of pricey litigation and high-stakes negotiations by elite attorneys on either side.
The query is whether or not Mr. Musk will likely be legally compelled to stay together with his agreed-upon acquisition or be allowed to again out, probably by paying a 10-figure penalty.
Most authorized consultants say Twitter has the higher hand, partly as a result of Mr. Musk connected few strings to his settlement to purchase the corporate, and the corporate is set to pressure the deal by.
However Mr. Musk revels in impulsiveness and brinkmanship and is backed by a fleet of high bankers and attorneys. Fairly than partaking in a protracted public brawl with the world’s richest man and his legions of die-hard followers, Twitter would possibly come beneath strain to discover a swift and comparatively peaceable decision — one that might protect the corporate’s independence however go away it in a tenuous monetary place.
Mike Ringler, a companion 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 imagine the metrics that Twitter has publicly disclosed about what number of of its customers had been faux.
Twitter’s board responded by saying it meant to consummate the acquisition and would sue Mr. Musk in a Delaware chancery courtroom to pressure him to take action.
On 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 interrupt off his deal by paying a $1 billion price, however solely beneath particular circumstances resembling dropping debt financing. The settlement additionally requires Twitter to offer information that Mr. Musk could require to finish the transaction.
Mr. Musk has demanded that Twitter give an in depth accounting of the spam on its platform. All through June, attorneys for Mr. Musk and Twitter have wrangled over how a lot information to share to fulfill Mr. Musk’s inquiries.
Mr. Musk’s chilly ft concerning the Twitter deal coincided with an enormous slide within the valuation of know-how corporations, together with Tesla, the electrical car firm he runs, which can be his fundamental 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’ telephone numbers and different digital clues about their identities, to find out 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 courtroom says Musk can stroll away,” mentioned David Larcker, a professor of accounting and company governance at Stanford College. “One other end result is that he’s compelled to undergo with the deal, and the courtroom can implement this. Or there is likely to be some center floor the place there’s a value renegotiation.”
For Twitter, finishing a sale to Mr. Musk is important. It struck its take care of Mr. Musk as know-how corporations had been having fun with optimistic valuations; some, like Snap and Meta, have now plummeted as they face advertising pressure, global economic upheaval and rising inflation. Twitter’s inventory has fallen about 30 p.c for the reason that deal was introduced, and trades effectively beneath the Mr. Musk’s providing value of $54.20 a share.
Authorized consultants mentioned Mr. Musk’s dispute over spam may very well be a ploy to pressure Twitter again to the bargaining desk in hopes of securing a cheaper price.
Throughout the deal-making, no different potential purchaser emerged as a white knight various to Mr. Musk, making his supply the most effective that Twitter is more likely to get.
Twitter’s trump card is a “specific performance clause” that offers the corporate the proper to sue Mr. Musk and pressure him to finish or pay for the deal, as long as the debt financing he has corralled stays intact. Compelled acquisitions have occurred earlier than: In 2001, Tyson Meals tried to again out of an acquisition of the meatpacker IBP, pointing to IBP’s monetary troubles and accounting irregularities. A Delaware courtroom vice chancellor dominated that Tyson had to complete the acquisition,
However authorized authority is completely different than sensible actuality. A lawsuit will most likely value thousands and thousands in authorized charges, take months to resolve and add additional uncertainty to already jittery employees.
Deal disagreements have usually resulted in settlements or renegotiations on value. In 2020, luxurious big LVMH Moët Hennessy Louis Vuitton attempted to break up its $16 billion deal to accumulate Tiffany & Firm, in the end securing a reduction of about $420 million.
“These items is a bargaining transfer in an financial transaction,” mentioned Charles Elson, a just lately retired professor of company governance on the College of Delaware. “It’s all about cash.”
A cheaper price would profit Mr. Musk and his monetary backers, particularly as Twitter faces monetary headwinds. However Twitter has made clear it desires to pressure Mr. Musk to stay to his $44 billion supply.
Essentially the most damaging end result for Twitter can be for the deal to break down. Mr. Musk would wish to indicate that Twitter materially and deliberately breached the phrases of its contract, a excessive bar that acquirers have not often met. Mr. Musk has claimed that Twitter is withholding data vital 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 courtroom {that a} materials change within the goal firm’s enterprise offers it the power to cleanly exit the deal. That occurred in 2017 within 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 when Twitter exhibits that it didn’t violate the merger settlement, a chancellor within the Delaware courtroom should still enable Mr. Musk to pay damages and stroll away, as within the case of Apollo World Administration’s deal combining the chemical corporations 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 supervise, and a chancellor could not need to order a purchaser to do one thing that he in the end doesn’t observe by on, a danger that’s significantly acute on this deal, given Mr. Musk’s habit of flouting legal confines.
“The worst-case situation for the courtroom is that it makes an order and that he doesn’t comply, and so they have to determine what to do about it,” mentioned Morgan Ricks, a professor at Vanderbilt Regulation Faculty.
Whereas Mr. Musk usually depends on a small circle of confidants to run his companies, which embody the rocket maker SpaceX, he has introduced in a bigger authorized workforce to oversee the Twitter acquisition. Along with his private lawyer, Alex Spiro, he tapped attorneys from Skadden, Arps, Slate, Meagher & Flom.
Skadden is a go-to company regulation agency, with ample expertise arguing circumstances in entrance of the Delaware courtroom, together with LVMH’s try to interrupt off its acquisition of Tiffany.
On its facet, Twitter has deployed attorneys 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 fame on offers in enterprise capital and know-how. Simpson Thacher is a New York-based regulation agency with extra expertise usually company mergers and acquisitions.
If Twitter renegotiates its acquisition value or accepts a breakup, it’s going to most likely face extra authorized issues. Shareholders would sue over both situation, including to a number of shareholder lawsuits Twitter is already dealing with over the acquisition. In April, monetary analysts known as Mr. Musk’s value a lowball supply, and Twitter shareholders may balk if the corporate agrees to additional scale back its acquisition value.
A breakup may additionally deliver added authorized scrutiny to Mr. Musk. The Securities and Alternate Fee revealed in Might 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 costs that his tweet falsely claiming he had secured funding to take Tesla non-public amounted to securities fraud.
“On the finish of the day, a merger settlement is only a piece of paper. And a bit of paper may give you a lawsuit in case your purchaser will get chilly ft,” mentioned Ronald Barusch, a retired mergers and acquisitions lawyer who labored for Skadden Arps earlier than it represented Mr. Musk. “A lawsuit doesn’t offer you a deal. It usually offers you a protracted headache. And a broken firm.”
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