“The Twitter board is committed to closing the transaction on the price and terms agreed upon with Mr. Musk.”
— Bret Taylor, Twitter board chair
“Twitter has not provided information that Mr. Musk has requested for nearly two months notwithstanding his repeated, detailed clarifications.”
— Mike Ringler, attorney for Elon Musk
When the banner popped up on my phone late last week with the news “Elon Musk terminates $44b Twitter deal,” the skeptic in me immediately thought, “Well, I saw that coming.” But the legal part of my brain then interrupted with, “That may be his desire, but it’s not going to be that easy.” And indeed, it’s not.
A quick review is probably in order. Over the past six months or so, Musk has purchased a controlling share of Twitter stock, been offered and turned down a seat on their board, came to terms on a $44 billion agreement to buy the company (despite it only having had one profitable year in the last decade), and then started to make statements (including on Twitter itself) casting doubt on his intentions. Last week, his lawyers sent a letter to the company indicating that he was unilaterally terminating the agreement.
There’s a lot to unpack here. First, the agreement provides that Musk will pay the company $54.20 per share. It has been suggested in some circles that perhaps he’s trying to create leverage to lower that price, but that’s highly unlikely to happen, at least under the current circumstances. A group of Twitter shareholders has already sued the company over the very existence of the takeover agreement, and Twitter’s board cannot unilaterally agree to lower the price.
Musk’s attorneys have claimed that Twitter has either withheld information or has materially misrepresented circumstances in communications with Musk. The billionaire has, himself, raised questions about how many fake accounts the service has. But those things alone aren’t a basis for Musk to terminate the agreement unless he can show that they materially affect the finances and potential earnings of the company. And at this point, he hasn’t even demonstrated that the claims about a lack of transparent communication are true. Twitter disputes those claims.
All of this, of course, comes down to money — and a lot of it. Musk does have a unilateral way out of the agreement, but it requires him to pay a substantial price for breaking the deal. Different sources have reported it as either $1 or $2 billion, but either way, he doesn’t want to pay a billion dollar price tag for an unwise decision to pursue a takeover. Thus, his claims of fraud by the company, which could potentially get him out of the deal without having to pay that penalty.
Experts in corporate law note that Twitter seems to be in a much stronger position here. In a piece for CNBC, Tulane law professor Anne Lipton noted that merger agreements are notoriously “hard to get out of” and that litigation will likely take a year or more. Boston College law professor Brian Quinn, quoted by Reuters, said that other than the recent firing of two Twitter executives, Musk didn’t seem to have many strong claims.
And then there’s the fact that the agreement includes what is called a “specific performance” clause. That clause permits Twitter to sue Musk to force him to perform his responsibilities under the agreement and go forward with the purchase. Twitter is likely to bring that action in the state of Delaware’s Court of Chancery very soon. (A large number of companies are incorporated in Delaware because of the state’s lenient corporate tax laws.)
It is always possible, of course, that the substantial costs of protracted litigation will lead Twitter and Musk to strike some kind of deal. If so, we are unlikely to ever learn the exact terms of that deal. But for now, we can rely on consistent 140 character updates on the legal action in this case.