“Having mounted a public spectacle to put Twitter in play, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he — unlike every other party subject to Delaware contract law — is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away,” the company wrote in a fiery legal complaint, referring to Musk’s exit strategy as a “model of hypocrisy.”
For months Musk has publicly threatened to walk away from the sale of the influential social network, efforts that culminated last week in a Securities and Exchange Commission filing claiming he was “terminating” the agreement because Twitter hadn’t given him enough information about spam and bots on its service. Twitter’s filing said that Musk’s complaints about bots had no merit, and that Musk, despite getting reams of data and information from Twitter, hadn’t been able to produce any evidence that the company’s estimates were wrong.
Now a judge in a specialized business court in Delaware must determine whether the billionaire can exit the $44 billion deal, despite a contract binding him to complete the acquisition barring a major change to the company’s business.
“Oh the irony lol,” Musk tweeted shortly after the case dropped.
Experts said they anticipated an agonizing legal drama to play out in the Delaware Court of Chancery, a tiny, clubby court that has decided the outcomes of some of the biggest business squabbles in the United States. The court has just seven judges — one chancellor and six vice chancellors — who have enormous discretion to force companies to take specific actions.
The process is likely to submit Twitter to a grueling level of public scrutiny, forcing the platform to open up its books and expose internal deliberations in ways that might further damage its stock price and reputation, already battered from the market downturn and months of sparring with Musk.
In the complaint, Twitter’s lawyers said Musk broke his promises to “use his best efforts to get the deal done” and accused him of refusing to honor his obligations because the deal he signed “no longer serves his personal interests.”
Elon Musk files to back out of Twitter deal
Although Musk agreed to buy Twitter at a premium, as market conditions worsened, Musk’s personal wealth has declined significantly — by more than $100 billion from its peak.
“So Musk wants out,” the complaint alleges. “Rather than bear the cost of the market downturn, as the merger agreement requires, Musk wants to shift it to Twitter’s stockholders.”
Twitter’s legal team argues Musk repeatedly disparaged the company on Twitter, referring to his attitude toward the platform as “disdain” for a company he was expected “to protect.” Musk began breaking rules earlier this year, the filing alleges, when he bought large amounts of Twitter stock without proper notification.
At first Musk claimed he was buying the company and taking it private to rid it of spam, Twitter’s lawyers note. Then, after the market downturn, Musk changed his tune, “suddenly demanding ‘verification’ that spam was not a serious problem on Twitter’s platform, and claiming a burning need to conduct ‘diligence’ he had expressly forsworn.”
The filing reveals new details about negotiations between Twitter and Musk, including the billionaire’s hardball tactics. In late March, as he was buying up a stake that would eventually give him more than 9 percent ownership of the company, Musk told Twitter CEO Parag Agrawal and Twitter board chair Bret Taylor that he was weighing three options: join its board, take Twitter private or start a competitor.
After agreeing to join Twitter’s board, then quickly backing out, Musk announced his offer to buy the company for $54.20 per share — a premium of about 38 percent from Twitter’s price one trading day before Musk’s 9.2 percent ownership was revealed.
The lawsuit is the latest in a tumultuous saga that began in April, when Twitter’s board accepted Musk’s surprise offer to purchase the long-struggling social media company.
Soon after, Musk began to throw wrenches in the deal, using his popular Twitter account to call out individual company executives and to highlight what he indicated were misleading estimates of spam and fake accounts on the platform. In May, Musk tweeted that the deal was “on hold” over the bot problem.
The fight escalated Friday, when Musk’s legal team said he was pulling out of the agreement in its letter to the SEC. Twitter executives and board members, who had long anticipated this sort of move from Musk, said they were prepared to take him to court to force him to follow through with the contract.
“We are confident we will prevail in the Delaware Court of Chancery,” Taylor tweeted last week.
Twitter views its chances in the court system as favorable because Musk had not pressed the platform on the bot issue before signing the contract, though the company had offered public quarterly estimates of spam and fake accounts for years. He had waived his right to due diligence, despite being well aware of the bot issue, the complaint said. Twitter estimates that spam and bot accounts make up fewer than 5 percent of the accounts on its service of 229 million daily users, but some outside researchers have projected that the number could be far higher. But Twitter doesn’t share comprehensive usage data with researchers, preventing significant external evaluation of the issue.
Musk’s question about spam and bots is nothing new for Twitter
Twitter’s leadership believes that sharing such extensive information would violate user privacy and could run afoul of data privacy laws, according to people familiar with internal discussions, who spoke on the condition of anonymity to describe them.
Experts on Delaware’s Chancery Court system say the rigid contract, combined with the fact that Musk failed to amend it and waived due diligence, will make it difficult for the billionaire to win in court.
“From the outside, it seems like Musk has an uphill climb,” said Jeremy Eicher, an attorney with more than a decade of experience representing clients with cases in the Chancery Court. “He’s a sophisticated buyer with a highly competent legal team that could have asked about these issues before. It’s not just a deal between two guys.”
But Eicher noted that in recent years, Chancery Court decisions have become fairly unpredictable and that the outcomes are frequently dictated by whims of any particular judge, who is known as a chancellor or a vice chancellor.
And Musk’s argument, that he and his team relied on and trusted Twitter’s bot estimates, and only found out later that those estimates might not be accurate, could be viewed as reasonable by a judge.
Attorneys involved in the case, as well as experts, expect that Chancellor Kathaleen McCormick, head of the Chancery Court and the highest-ranking of the seven judges in the system, will take the case herself. Last year McCormick forced private equity firm Kohlberg & Co. to go through with a deal to buy cake-decorating supply company DecoPac after the firm tried to get out of the deal.
Experts said it is more common for the Chancery Court to force a company to follow through with its contractual obligations than to enable the buyer to wiggle out of a deal. The bar is fairly high for doing so.
But the court has allowed companies to get out of deals in some cases where the judge determined that the business being acquired was not forthright. In one notable case in 2018, a Chancery Court judge allowed medical-care company, Fresenius, to terminate its planned purchase of generic pharmaceutical company, Akorn, after finding that Akorn had not disclosed major “data integrity” issues to the acquirer.
Experts said they expected the case to last four to six months, a far speedier timeline than other types of court cases and one reason that businesses prefer to headquarter in Delaware. Twitter hopes for a trial of a week or less, a person familiar with the discussions, who spoke on the condition of anonymity, told The Washington Post.
Both Twitter and Musk have hired law firms with close ties to the Chancery Court, a reflection of the tightly knit system. Last week Twitter hired Wachtell, Lipton, Rosen & Katz. Leo Strine Jr., former chief justice of the Delaware Supreme Court and former chancellor of the Chancery Court, is corporate counsel at Wachtell. And a current vice chancellor of the Chancery Court, Lori Will, hails from Skadden, Arps, Slate, Meagher and Flom, a firm which is representing Musk. Will also formerly clerked for Strine.
Twitter shares plunge as it braces for messy legal battle with Elon Musk
There’s a multitude of ways the disagreement could be resolved, legal experts say, though most doubt that Musk will be able to walk away without forfeiting some sort of payment.
“If I had to call it today, Twitter’s got the better of the argument,” said Lawrence Hamermesh, executive director of the Institute for Law and Economics at the University of Pennsylvania Carey Law School. “What remedy the court will give is harder to forecast.”
The court could order that Musk pay the $1 billion breakup fee specified in the contract, but that may not satisfy Twitter, which has faced a sinking stock and an increasingly beleaguered workforce as the deal created uncertainty around the future of the brand.
The court could also order Musk to go through with the $44 billion deal, a decision that would be “momentous,” said Anthony Casey, a professor of law and economics at the University of Chicago Law School.
But it’s not unheard of. In a 2001 decision, the court ruled Tyson Foods needed to complete its acquisition of IBP Inc. after the foods giant tried to call it off.
Forcing Musk to go through with the deal could lead to a court appeal and an uneasy tension between a reluctant owner and his new team. Already many Twitter employees have protested his ownership.
Some legal experts think the most likely outcome is for the two sides to reach some sort of settlement agreement, either one that allows Musk to buy Twitter for a lower price or that requires him to pay a higher breakup fee to Twitter. But Musk is the wild card.
“I think Musk is a little less predictable than most litigants,” Casey said.