Elon Musk, the chief executive officer of Tesla and the world’s richest person, said on Friday he was terminating his $44 billion deal to buy Twitter because the social media company had breached multiple provisions of the merger agreement.
Twitter’s chairman, Bret Taylor, said on the micro-blogging platform that the board planned to pursue legal action to enforce the merger agreement.
“The Twitter Board is committed to closing the transaction on the price and terms agreed upon with Mr. Musk…,” he wrote.
In a filing, Musk’s lawyers said Twitter had failed or refused to respond to multiple requests for information on fake or spam accounts on the platform, which is fundamental to the company’s business performance.
“Twitter is in material breach of multiple provisions of that Agreement, appears to have made false and misleading representations upon which Mr. Musk relied when entering into the Merger Agreement,” the filing said.
Musk also said he was walking away because Twitter fired high-ranking executives and one-third of the talent acquisition team, breaching Twitter’s obligation to “preserve substantially intact the material components of its current business organization.”
Musk’s decision is likely to result in a protracted legal tussle between the billionaire and the 16-year-old San Francisco-based company.
Disputed mergers and acquisitions that land in Delaware courts more often than not end up with the companies re-negotiating deals or the acquirer paying the target a settlement to walk away, rather than a judge ordering that a transaction be completed. That is because target companies are often keen to resolve the uncertainty around their future and move on.
Twitter, however, is hoping that court proceedings will start in a few weeks and be resolved in a few months, according to a person familiar with the matter.
There is plenty of precedent for a deal renegotiation. Several companies repriced agreed acquisitions when the COVID-19 pandemic broke out in 2020 and delivered a global economic shock.
Shares of Twitter were down 6% at $34.58 in extended trading. That is 36% below the $54.20 per share Musk agreed to buy Twitter for in April.
Twitter’s shares surged after Musk took a stake in the company in early April, shielding it from a deep stock market sell-off that slammed other social media platforms.
But after he agreed on April 25 to buy Twitter, the stock within a matter of days began to fall as investors speculated Musk might walk away from the deal. With its tumble after the bell on Friday, Twitter was trading at its lowest since March.
The announcement is another twist in a will-he-won’t-he saga after Musk clinched the deal to purchase Twitter in April but then put the buyout on hold until the social media company proved that spam bots account for less than 5% of its total users.
The contract calls for Musk to pay Twitter a $1 billion break-up if he cannot complete the deal for reasons such as the acquisition financing falling through or regulators blocking the deal. The break-up fee would not be applicable, however, if Musk terminates the deal on his own.
Some employees expressed disbelief and exhaustion on Friday, publicly posting memes on Twitter, such as of a rollercoaster ride and a baby screaming into a phone, in apparent commentary on the breakup. Employees have worried about the deal will mean for their jobs, pay and ability to work remotely, and many have expressed skepticism about Musk’s plans to loosen content moderation. read more
In the light of this, analysts and legal experts believe that Twitter Inc has a strong legal case against Elon Musk walking away from his $44 billion deal to acquire the U.S. social media company but could opt for a renegotiation or settlement instead of a long court fight.
According to a law professor at UC Berkeley, Adam Badawi: “The argument for settling at something lower is that litigation is expensive. And this thing is so messy that it might not be worth it.”
Musk’s main claim against Twitter is that the San Francisco-based company breached their deal because it will not share with him enough information to back up its claim that spam or fake accounts constitute less than 5% of its active users. Twitter has stood by this estimate but also said it’s possible the number of these accounts is higher.
“If it goes to court, Musk has the burden to prove more likely than not, that the spam account numbers not only were false, but they were so false that it will have significant effect on Twitter’s earnings going forward,” Associate Dean for Faculty Research at Tulane Law School, Ann Lipton said.
Musk also said in a letter to Twitter on Friday that the company’s misrepresentation of the number of spam accounts might be a “material adverse effect (MAE)” that would allow him to walk away under the terms of the deal contract.
But legal experts said Delaware courts view MAEs as dramatic, unexpected events that cause long-term harm to a company’s performance. Deal contracts such as the one between Musk and Twitter are so prescriptive that a judge has ruled that an MAE has validly been triggered only once in the history of such litigation – in the case of German healthcare group, Fresenius Kabi AG ending its deal for U.S. generic, drugmaker’s Akorn Inc in 2018.
In that case, a court ruled that Akorn’s assurances to Fresenius that it was in compliance with its regulatory obligations were inaccurate. It also found that Akorn had withheld facts about its deteriorating performance that emerged in whistleblower allegations.
Legal experts were dismissive of the idea that inaccurate spam account numbers would amount to an MAE for Twitter on the same level as the problems that plagued Akorn.
Musk also claimed that Twitter breached their agreement by firing two key high-ranking employees, its revenue product lead and general manager of consumer, without his consent as required by their contract.
“That’s probably the only claim that has any purchase,” said a professor at Boston College Law School, Brian Quinn, but he added he did not believe the firings were serious enough to affect Twitter’s business.
In 2020, the Delaware court allowed Mirae Asset Capital Co of South Korea to walk away from a $5.8 billion luxury hotel deal because the pandemic caused the seller, Anbang Insurance Group of China, to alter its ordinary course hotel operations.
Most of the times the courts find in favor of the target companies and order acquirers to complete their deals – a legal remedy known as “specific performance.”
In 2001, for example, Tyson Foods, the largest U.S. chicken processor, decided it no longer wanted to buy the largest meatpacker, IBP Inc. A judge ordered that the deal be completed.
