Why is Musk stepping away?
The core of Musk’s case centers on his belief that the number of spam bot accounts on the Twitter platform is far greater than the company’s claim of less than 5% of its daily active users. The letter from lawyers for Musk, whose shares in his electric car company Tesla were to help finance the deal, argues that the underrepresentation of the number of spam accounts on the platform – which Twitter denies – is “prejudicial company result”, which basically means that something is wrong with the business and it is nowhere near worth the $54.20 per share that was agreed upon.
How strong is Musk’s case?
The merger agreement contains a clause (6.4) stating that Twitter must provide Musk with all data and information requested by the multibillionaire “for any reasonable business purpose related to the completion of the transaction.” That’s a covenant in the deal – a promise to act in a certain way during the sale process – and breaking it would allow Musk to walk away without penalty. But legal experts questioned whether failing to provide more than what Twitter has already shared about its bot count would violate the agreement. The agreement makes heavy use of the word “reasonable” when defining what information requests are acceptable. “The agreement does not give him the right to receive information, for any reason,” said Brian Quinn, an associate professor at Boston College Law School. “He will bear the burden of proving to the court that he had a legitimate need for the information and that his requests were reasonable. It cannot use unreasonable requests for information to create a pretext to claim an infringement.” Quinn describes the material adverse effect clause as “basically a non-starter.” “His letter basically admits as much: it says they’re still suspicious [the alleged spam problem] outside. It is not possible and will fail.”
Does Musk have other legal arguments?
His lawyers also argue that Twitter breached the merger agreement by failing to seek Musk’s consent when it fired two executives and fired a third of its talent acquisition (or HR) team. This may seem a narrow basis for terminating an agreement, but the agreement states (Clause 6.1) that Musk must be notified when Twitter deviates from its obligation to conduct its business in the ordinary course and must “maintain intact the material elements of the current business organization’. Quinn believes this argument has some weight and the court will consider it. But, he added, “I’m guessing here that the court will probably decide that these layoffs are more like business as usual than not.” Alternatively, Musk could try to go the financing route. The specific performance clause (9.9) requires that the debt financing underlying a significant portion of the deal “has been funded or will be funded at closing.” However, the banks’ $13 billion funding commitment is also covered by a legal settlement, so Twitter can be expected to consider its legal options if Musk’s banks try to pull out. Subscribe to the Business Today daily email or follow Guardian Business on Twitter @BusinessDesk
What are Twitter’s options?
Twitter Chairman Brett Taylor said Friday that the company “will take legal action to enforce the merger agreement.” If it does, the case will be heard in Delaware, the US state that has jurisdiction over the deal. Twitter’s board is committed to closing the transaction based on the price and terms agreed with Mr. Musk and plans to take legal action to enforce the merger agreement. We are confident that we will prevail in the Delaware Court of First Instance. — Bret Taylor (@btaylor) July 8, 2022 Quinn said he expected Twitter to file a court ruling that it wasn’t in violation of the agreement and that Musk couldn’t just walk away. Experts also expect Twitter to seek a court order for Musk to fulfill his obligations under the deal – in other words, to buy the company. This is known as ‘specific performance’. John Coffee, a law professor at Columbia University, said: “They’re going to sue in Delaware court for specific performance. That is, asking for an order compelling Musk and his affiliates to close the deal at the original price.” The company also has the option of asking Musk for a $1 billion break fee under the deal, rather than forcing him to buy it.
Is it possible to arrange?
If Twitter wins its case, it could force the world’s richest man to buy a business he doesn’t want. “Most disputes like this usually result in settlements that allow plaintiffs and defendants to save face,” said Carl Tobias, Williams chair at the University of Richmond. There’s also the possibility that if Musk finds he still wants to own Twitter but is concerned about paying too much, both sides agree to a lower price. However, Twitter’s institutional shareholders may resist this. “I doubt the court will rule before there’s a settlement, and the daily price of Twitter will give you some idea of what the Musk side will be hoping to pay,” Coffee said. Twitter shares are currently trading at less than $37, valuing the company at $28 billion.
