The Elon Musk-Twitter Saga has now moved to the courts

Now that Elon Musk has indicated his intention to do so Walking away from his $44 billion offer to buy TwitterThe fate of the influential social network will be determined by what may be an epic court battle, involving months of costly litigation and high-stakes negotiations by elite lawyers on both sides.

The question is whether Mr. Musk will be legally forced to abide by the agreed takeover or allow him to back off, perhaps by paying a 10-figure fine.

Most legal experts say Twitter has the upper hand, in part because Mr. Musk attached some leads to his approval to buy the company, and the company is determined to seal the deal.

But Musk is impulsive and edgy, backed by a fleet of top bankers and lawyers. Instead of engaging in a protracted public squabble with the world’s richest man and his hordes of fanatical followers, Twitter may be under pressure to find a quick and relatively peaceful solution — one that could preserve the company’s independence but leave it in a vulnerable financial position. Site.

Mike Ringler, a partner at Skadden, Arps, Slate and Meagher & Flom who represents Mr. Musk, told Twitter late Friday that his client was abandoning the acquisition. In his letter, Mr Ringler argued that Twitter had breached the agreement with Mr Musk by not providing him with detailed information on how it was measured. Incorrect accounts. He also said that Mr. Musk does not believe the metrics that Twitter has publicly disclosed about the number of fake users.

Twitter’s board responded by saying it intended to complete the acquisition and would sue Mr. Musk in Delaware court to force him to do so.

At the heart of the dispute are the terms of the merger agreement that Mr. Musk reached with Twitter in April. His contract with Twitter allows him to break his deal by paying a $1 billion fee, but only under specific circumstances such as losing debt financing. The agreement also requires Twitter to provide data that Mr Musk may request to complete the transaction.

Mr. Musk has asked Twitter to provide a detailed account of spam on its platform. Throughout June, Mr Musk’s lawyers and Twitter argued about how much data should be shared to satisfy Mr Musk’s inquiries.

Mr. Musk’s reaction to the Twitter deal has coincided with a significant slide in the valuation of technology companies, including Tesla, the electric car company he runs, which is also his main source of wealth. Mr. Musk did not respond to a request for comment.

Twitter maintains that the spam numbers are accurate, but has refused to publicly disclose how it detects and accounts for spam accounts because it uses private information, such as users’ phone numbers and other digital clues about their identities, to determine if the account is not genuine. A Twitter spokesperson declined to comment on when Twitter planned to file a lawsuit to enforce the merger agreement.

“The results are: The court says Musk can walk away,” said David Larker, professor of accounting and corporate governance at Stanford University. “The other consequence is that he is forced to go through with the deal, and the court can force that. Or there may be a compromise where there is a renegotiation of prices.”

For Twitter, completing the sale to Mr. Musk is vital. She struck a deal with Mr. Musk as the tech companies had upbeat valuations. Some, like Snap and Meta, have now collapsed They face advertising pressure, global economic turmoil, and rising inflation. Twitter’s stock is down about 30 percent since the deal was announced, and is trading below Mr. Musk’s offer price of $54.20 a share.

Legal experts said Musk’s spam dispute may be a ploy to force Twitter back to the negotiating table in the hope of a lower price.

While deals are being struck, no other potential buyer has emerged as a replacement for Musk’s white knight, making his bid the best Twitter can get.

The trump card on Twitter isspecific performance condition“It gives the company the right to sue Mr. Musk and force him to complete the deal or pay for it, as long as the debt financing he agreed to remains intact. Forced acquisitions have happened before: In 2001, Tyson Foods attempted to back off its takeover of IBP meatpacking company ، that Tyson had to complete the acquisition,

But legal authority differs from practical reality. A lawsuit could potentially cost millions in legal fees, take months to resolve and add more uncertainty to already nervous employees.

Disagreements over the deal often end in settlements or a renegotiation of the price. In 2020, the luxury giant LVMH Moët Hennessy Louis Vuitton He tried to break up his $16 billion deal to acquire Tiffany & Company, and ultimately receive a discount of approximately $420 million.

“This stuff is a bargaining move in an economic deal,” said Charles Elson, a newly retired professor of corporate governance at the University of Delaware. “It’s all about the money.”

The lower price would benefit Mr. Musk and his financial backers, especially as Twitter faces financial headwinds. But Twitter has made clear that it wants to force Mr. Musk to stick to his $44 billion offer.

The most damaging consequence for Twitter would be the collapse of the deal. Mr. Musk will need to show that Twitter has materially and willfully violated the terms of his contract, a high standard that acquirers rarely adhere to. Mr Musk claimed that Twitter is withholding information needed for him to close the deal. He has also argued that Twitter misreported its spam numbers, and that misleading statistics masked a serious problem in Twitter’s business.

The buyer has only successfully argued once in Delaware state court that a material change in the target company’s business gives it the ability to exit the deal cleanly. It happened in 2017 in the $3.7 billion acquisition of drug company Akorn by healthcare company Fresenius Kabi. After Fresenius signed the agreement, Akorn’s profits plummeted and faced allegations by whistleblowers of circumventing regulatory requirements.

Even if Twitter shows that it did not violate the merger agreement, a counsel in Delaware court may still allow Mr. Musk to pay damages and walk away, as in the case of the Apollo Global Management deal that brought together chemical companies Huntsman and Hexion in 2008 (the lawsuit was concluded in a failed deal and A billion dollar settlement.)

Forcing an acquirer to buy a business is a complex process that must be overseen, and the advisor may not want to order the buyer to do something they ultimately don’t pursue, a particularly acute risk in this deal, given Mr. Musk. Usually flouting legal restrictions.

“The worst-case scenario for a court is that they make an order and he doesn’t comply, and they have to figure out what to do about it,” said Morgan Rex, a professor at Vanderbilt Law School.

While Mr. Musk typically relies on a small circle of confidants to run his business, including rocket maker SpaceX, he has brought in a larger legal team to oversee the Twitter acquisition. In addition to his personal attorney, Alex Spiro, he hired attorneys from Skadden, Arps, Slate, Major and Flom.

Skadden is a corporate law firm with extensive experience debating cases in Delaware court, including LVMH’s attempt to halt its acquisition of Tiffany.

For its part, Twitter has posted lawyers from two firms, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett, to manage the deal. Wilson Soncini is a longtime Twitter legal advisor, who has built his reputation on deals in venture capital and technology. Simpson Thacher is a New York-based law firm with more experience in general corporate mergers and acquisitions.

If Twitter renegotiates the acquisition price or accepts a breakup, it will likely face further legal trouble. Shareholders may sue in either scenario, adding to the many shareholder lawsuits Twitter is already facing over the acquisition. In April, financial analysts described Mr. Musk’s price as a low-key offer, and Twitter shareholders could decline if the company agreed to lower the acquisition price further.

The separation could also lead to further legal scrutiny of Mr. Musk. Securities and Exchange Commission open In May, it was examining Mr. Musk’s purchases of Twitter stock and whether he had properly disclosed his stake and intentions to the social media company. In 2018, the organizer was awarded 40 million dollar settlement Musk and Tesla over accusations that his tweet falsely claiming he obtained funding to take Tesla private was a securities fraud.

“At the end of the day, the merger agreement is just a piece of paper. A piece of paper can give you a lawsuit if the buyer gets cold,” said Ronald Baruch, a retired merger and acquisitions attorney who worked at Skadden Arps before Mr. Musk represented. Judicial does not give you a deal. It usually gives you a long-term headache. and corrupt company.”