Twitter Inc has hired US-based legal heavyweight Wachtell, Lipton, Rosen & Katz LLP to sue Tesla CEO Elon Musk after he walked away from an agreed $44 billion deal to acquire the social media platform, Reuters reported on Monday. Musk terminated the deal with Twitter on Friday, July 8, stating that the microblogging site had failed to provide information regarding fake accounts on the platform, following which Twitter’s chairman, Bret Taylor, swore a legal fight.
Twitter is mulling filing a lawsuit early this week in Delaware, the report added. Wachtell, Lipton, Rosen & Katz was also one of the legal advisers for Musk’s plan to take Tesla private in 2018. Meanwhile, Twitter’s existing legal team comprises, Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett LLP.
Let’s take a look at what happens next, can Elon Musk win the case or is a settlement possible between the two?
Why Is Elon Musk Walking Away From The Deal To Acquire Twitter?
Musk’s pulling out of the deal with Twitter marks the latest turn in a long-running tale after he decided to buy Twitter in April this year. The Tesla chief has claimed that the microblogging platform was in “material breach” of the agreement and had made “false and misleading” statements during deal talks. The focus of Musk’s case pivots on his belief that the count of spam bot accounts on Twitter’s platform is far higher than the company’s declaration of fewer than five per cent of its daily active users.
He first raised the concern regarding spam accounts on the social media platform in May this year. At that point, he had stated that the deal was “temporarily on hold” until he got the data from Twitter. In a filing with the US Securities and Exchange Commission (SEC), the Tesla chief’s lawyers argue that under-representing the number of spam accounts on the microblogging site, which Twitter denies, comprises a “company material adverse effect”, which in effect implies that something is seriously amiss at the business and values nowhere near the $54.20 a share agreed on.
Stating another reason behind pulling out from the deal, Musk said Twitter sacked senior executives and a third of the company’s talent acquisition team, violating Twitter’s responsibility to “preserve substantially intact the material components of its current business organisation.” Besides these broad reasons, several other determinants could have played a role in Musk’s decision. Firstly, a lot of questions have been raised regarding how he would fund the $44 billion deal.
In May this year, Musk informed the US SEC that the deal would comprise $33.5 billion in equity, up from an earlier promise of $27.25 billion. He had also sold his Tesla stock worth approx. $8.5 billion and had secured around $7 billion from investors comprising Prince al-Waleed bin Talal of Saudi Arabia. However, Musk had told the SEC that he was still seeking additional financing and was holding talks with Twitter shareholders, which includes its former CEO Jack Dorsey, about possibly keeping their stakes in the company.
Meanwhile, it is still not clear if he has managed to mobilise enough funds to finance the deal. Secondly, tech stocks worldwide have witnessed a massive correction since the deal was announced. Twitter’s stock has plunged by around 29 per cent since April 25 when it accepted Musk’s offer. The scrip closed at a value of $36.81 on the New York Stock Exchange (NSE) on Friday, as compared to $51.70 on April 25. Meanwhile, Tesla’s stock has dipped by over 24 per cent since the deal was announced.
How Strong Is Elon Musk’s Case?
The agreement comprises a clause which states that Twitter must give Musk all data and information that the latter requests “for any reasonable business purpose related to the consummation of the transaction.” The clause is a covenant in the deal and violation of it would allow the Tesla chief to pull out of it without sanction. However, legal experts contest if failure to provide more information that has already been shared by Twitter concerning its bot count would violate the covenant.
What Are The Choices Before Twitter? What’s Next In The Case?
This could be a lengthy legal battle for Musk and Twitter, as the microblogging site has clearly expressed that it will follow the legal route to enforce the terms and conditions of the deal. Twitter’s chairman Bret Taylor said in a Tweet on July 9, that the company’s “board is committed to closing the transaction on the price and terms agreed upon with (Elon) Musk and plans to pursue legal action to enforce the merger agreement.”
“We are confident we will prevail in the Delaware Court of Chancery,” he added.
The Twitter Board is committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plans to pursue legal action to enforce the merger agreement. We are confident we will prevail in the Delaware Court of Chancery.
— Bret Taylor (@btaylor) July 8, 2022
Contested mergers and acquisitions that land in Delaware courts mostly wind up with the concerned party re-negotiate deals or the acquirer paying the target a settlement to walk away, instead of a judge ruling that a transaction be concluded, according to Reuters. Several experts expect Twitter to solicit an order from the court that Elon Musk honours the deal by buying the company.
Is A Settlement Between Elon Musk And Twitter Possible?
In case Twitter wins the case, it could coerce Musk to buy a business he doesn’t want. “Most similar disputes usually conclude with settlements that permit plaintiffs and defendants to save face,” Carl Tobias, Williams chair in law at the University of Richmond told The Guardian. It is also likely that if Elon Musk still wants to buy Twitter, but is concerned about overpaying, both parties agree on a lower price. But, Twitter’s institutional investors might push back against that. “I doubt that the court will get to rule before there is a settlement, and the day-to-day price of Twitter will give you some idea of what Musk’s side will hope to pay,” John Coffee, a professor of law at Columbia University told the publication.
