On Friday, Musk said Twitter was in “material breach of multiple provisions” of the deal that would have given him the right to walk away, ending weeks of speculation about the billionaire’s desire to buy the company. Twitter hit back, announcing that it plans to sue Musk in Delaware Court, where the company is based, to force him to honor the deal at the agreed price of $54.20 per share. I think we’ll finally see if Elon Musk is ‘above the law’ The action and backlash sets the stage for a costly legal battle that could plunge the company into further turmoil. Twitter could choose to accept a settlement or negotiate with Musk for a lower price to avoid high legal fees and further uncertainty amid layoffs and high morale within the company. But if the deal goes all the way to court, Musk and his legal team face a tough challenge, according to legal experts, who suggest Twitter may have an advantage. “I think we’ll finally see if Elon Musk is ‘above the law,’” said John Coffee of Columbia Law School. “I’m sure in Delaware courts the answer is no. The law is pretty clear that you can’t get out of an agreement in the way that he seeks.” Wary acquirers have historically attempted to argue that a company has experienced a “material adverse effect” (MAE) to cancel a merger agreement, citing as evidence the deterioration of the target company’s business results. But Delaware courts have only once ruled that a company could escape through MAE, leaving obscure buyers like Musk to rely on other legal arguments to avoid a deal. Musk claims Twitter breached three separate provisions of his contract. First, he said Twitter had repeatedly failed to provide sufficient information about fake and spam accounts needed to facilitate financial planning for the transaction. Second, Musk’s representatives say they conducted a preliminary assessment of the data they could access and found that the number of spam and fake accounts on the platform was “wildly higher” than the 5 percent Twitter estimates. As such, Twitter’s public disclosures as part of the settlement contain “materially inaccurate statements,” they say. Finally, Musk argued that the departures of key Twitter employees since the deal was signed showed that Twitter was deviating from its obligation to “conduct its business in the ordinary course,” another breach that could be an escape hatch for the company. Mask Musk had discussed the issue of the fake account for months in interviews and in his own tweets. Twitter defended the 5 percent figure as accurate and agreed to some of its data demands. However, the company has said it cannot share the full data set required for the review with third parties, as this includes sensitive user information protected by privacy laws.

“Requiring information does not necessarily justify denial of closure [the deal]”, said Coffee. More broadly, Twitter is likely to argue that Musk’s concerns are merely masking buyer’s remorse over an expensive and highly leveraged deal. Musk has received $13 billion in debt commitments from several Wall Street banks. Debt pricing has become noticeably more expensive in recent weeks as banks have struggled to place the loans and bonds backing other leveraged buyouts. Musk has also committed to raising more than $30 billion in equity himself. It has previously announced that it has lined up some co-investors, including private equity firms like Brookfield and Andreessen Horowitz to lighten the load. Tesla shares have tumbled more than 35 percent so far this year, and Musk himself sold $8.5 billion worth of stock to help finance the deal. “Musk will have to prove that these are actual violations of the agreement,” said Ann Lipton, a professor of corporate law at Tulane University. “But because his behavior so far has shown so brazenly that he was looking for any excuse to back down, he will start the case with a serious credibility problem.” Terms of the deal include a $1 billion termination fee that Musk would have owed if he was generally responsible for the deal’s collapse. Twitter negotiated a so-called special performance clause that binds Musk to complete the deal if all other closing conditions are met. While Delaware courts have generally been unimpressed with buyers arguing either MAE or technical breaches of terms or representations, in some cases buyers have been successful. For example, the Delaware Court of First Instance ruled in 2020 that Korea’s Mirae could terminate its acquisition of a luxury hotel group owned by China’s Anbang because the seller had failed to operate the business in a manner consistent with past practice after signing agreement. Even if Twitter wins in court, the judge may refuse to enforce a settlement, experts note. “It’s very scary to order specific performance in a situation like this. There is external funding that needs to be done to make it work. And what if Musk defies your order? It’s turning into a showdown over the court’s jurisdiction and power — what’s going on at ground level?” Vanderbilt law professor Morgan Ricks tweeted. A court battle between Musk and Twitter could prove lengthy, as the process would have to dive into the details of Twitter’s activities and the company’s actions after the signing. Instead, the parties could argue for a new agreement in order to avoid a costly and potentially embarrassing trial. In June, software company Anaplan agreed to cut its sale price to Thoma Bravo by $400 million in an $11 billion deal after the private equity firm said Anaplan violated the merger agreement by paying $32 million more in recent employee bonuses than what had been revealed. in the merger agreement. Anaplan insisted in securities filings that it did not believe the extra bonuses constituted a violation, but to avoid a legal dispute, it agreed to take a lower price. If Musk and Twitter agree to a compensation payment instead of a revised price, the merger agreement caps that amount at $1 billion. However, the sides could simply agree to a higher number to stop hostilities. If the conflict reaches a courtroom, Musk’s testimony could prove the tipping point. In 2021, he dramatically met a lawyer representing Tesla shareholders who had accused him of improperly bailing out SolarCity, another Musk company that Tesla had acquired in 2017. “I think you’re a bad person,” Musk told the lawyer who questioned him. The Delaware court cleared him of any wrongdoing in this acquisition. Additional reporting by Richard Waters in San Francisco and Antoine Gara in New York