Although the legal case for social media company is stronger, Musk could still be successful, legal experts suggest.
“This is a ‘code red’ situation for Twitter and its board as now the company will go head-to-head against Musk in a ‘Game of Thrones’ court battle to recoup the deal and/or the breakup fee of $1 billion at a minimum,”Dan Ives, analyst for Wedbush Securities wrote. “We see no other bidders emerging at this time while legal proceedings play out in the courts.”
Musk attempted to stop his $44 billion acquisition of Twitter last week. He claimed in an SEC filing, that Twitter had not provided data on fake accounts and spam that he requested. Twitter replied that it would Take legal actionEnsure compliance with the merger agreement
Musk had started the process of buying the company months earlier. Musk announced in May that the deal was done. “temporarily on hold”While he worked on the metrics of spam accounts, The filing reiterated that he felt Twitter hadn’t been providing all the information Musk requested for two months and was therefore breaching the merger agreement. Experts have said that the concerns are a pretext to back out from an impulsive bid for a takeover. This may be because of the plunges in Tesla’s stock prices (-37%) as well as Twitter’s (-13%) stock prices since the beginning.
These are the most likely outcomes of this drama as it unfolds in court over the next few months.
Twitter wins with a stronger case but its future remains uncertain
In this legal battle, the Twitter board will attempt to hold Musk accountable for the $44 billion deal before a Delaware Chancery Court. The company’s argument is that the billionaire breached his contractual obligation to purchase all of Twitter stock at $54.20 per share in the acquisition, in which he waived due diligence in order to get the deal done quickly. Musk is unlikely not to walk away from this deal without a penalty.
“Legally, Twitter absolutely has the best case,”Aron Solomon, Esquire Digital’s head of strategy, shared his thoughts with. “Ultimately, none of this is going away quickly.”
Solomon explained that Twitter could have the upper hand by arguing Musk violated the contract. And Musk’s argument that the company has failed to provide information on bot accounts and spam isn’t enough to rescind the merger agreement.
“While Musk argues that Twitter is in breach by refusing to provide information relevant to the purchase of the company, this information will now need to be part of the legal discovery process,”Solomon spoke. “So we’ll find out whether Musk was right about there being far more bots on Twitter than the company claims or not.”
President of West Coast Trial Lawyers Neama Rahmani stated that the agreement contained a performance provision that required Musk to proceed with the merger, unless he has exceptional circumstances that permit him to walk away. Rahmani stated that Musk will still need to pay $1 million in breakup costs and may be sued for damages.
“This is more likely a business decision than a legal one, with Musk threatening to cancel the deal and force Twitter to spend millions of dollars in litigation, to try to get a better price for the company,”Rahmani stated.
Still, Twitter’s future as a company remains on shaky ground. Even leading up to this takeover, the social platform had been struggling to find monetization options, only launching its subscription service, Twitter Blue, recently, and transitioning to new leadership under Parag Agrawal following founder Jack Dorsey’s exit last year. Twitter shares fell 6% Monday morning, giving the company a value of around 40% below the Musk-agreed price.
Musk could try another legal avenue
On the other side, Musk’s lawyers are arguing that Twitter breached the merger agreement when it failed to provide requested information relevant to the deal. Musk could also use Twitter’s recent layoffs as an argument that Twitter didn’t get Musk’s approval when two executives were fired along with one-third of its talent acquisition team.
Musk’s team could use this clause specifying that Twitter has an obligation to “preserve substantially intact the material components of its current business organisation.” But Rahmani pointed out that it isn’t as strong a case.
“The argument that Twitter failed to provide information on spam accounts or misrepresented the number of spam accounts, or that Twitter breached the agreement by firing senior employees, are weak factually and even if true, are not ‘material’ adverse effects under the agreement. That requires something much more significant and unexpected,”Rahmani stated.
Musk is on the hook for a $1 billion penalty payment to the company if the deal falls through, but it seems likely that money isn’t the totality of what he’s looking for in this fight.
“Musk wins even by losing in that litigation gives him what he seems to most crave — remaining in the public spotlight,”Solomon spoke.
Still possible is a settlement or deal
The last possible outcome is a negotiated settlement that could result in a deal still going through — granted, most likely at a much lower price than the original offer.
But Twitter’s shareholders may fight a lower price and push back on a new deal. Musk could be required to pay a settlement in addition to the $1 billion termination fee. However, the board would need to show that this is a better alternative to pursuing legal action to force the deal through.
A new offer may fall somewhere in the range of Twitter’s current market valuation. Twitter’s shares are trading at around $32, plunging some 11.3% on Monday after news of Musk’s termination, putting the company’s market capitalization at $24.95 billion. Subject to regulatory approval and the approval of Twitter stockholders, the deal is expected to close this year. Musk had $25.5 billion of fully-reserved debt and margin loans financing secured and Musk is offering $21.0 billion equity as a commitment.
