Elon Musk could end up paying $1 billion in breakup fees if he follows through with his $44 billion deal to purchase Twitter. Twitter stated Friday that it would take him to court in order to enforce the agreement.
Insider was told by experts that there were no ways Musk could walk away from the deal before Friday’s announcement to regulators.
Musk has criticized Twitter’s claim that bots account for less than 5% of its accounts.
After Musk stated he would break the deal, Twitter released a statement saying that it would “pursue litigation to enforce the merger agreement.”
“A very difficult legal claim to win”
Contracts are designed to provide certainty for sellers and include protections to ensure that the deal is completed without any material adverse consequences.
Musk raised concerns about the number of Twitter bots. However, Delaware courts have set a high standard for what constitutes a “material detrimental effect” that allows a buyer to cancel a deal. Brian Quinn is an associate professor at Boston College Law School. Due to Delaware’s business-friendly legal structure, many Delaware companies are registered.
“Generally, with these types of deals, once you’ve signed it, except government intervention or an under-bidder or any material adverse events between signing and closing. These deals will close,” Quinn stated before Musk tried to cancel the deal. Quinn called a material adverse event a “very difficult legal claim to win.”
Contracts often limit the amount of material adverse effects that can be considered to be a derailment.
According to the merger agreement, Twitter’s lawyers were thorough in describing a list of events that could not damage the deal. These included market conditions, natural catastrophes, COVID-19, and any other pandemics. Quinn stated that there was no hard evidence to support the claim of walking away from the deal, except for fraud.
Renegotiating
According to Chester Spatt (a professor of finance at Carnegie Mellon University’s Tepper School of Business and an ex-chief economist at the Securities and Exchange Commission), Twitter might have reasons to negotiate. He made comments before Musk’s SEC filing.
He said that while Twitter users may believe they will prevail in court, they are eager to end the uncertainty. Or they may feel they can save Musk’s face by allowing them to concede a bit rather than paying the legal costs.
Some observers remain sceptical that renegotiation could be possible. Insider was told by Carl Tobias (Williams Chair in Law, University of Richmond), that he believes Twitter will resist lowering the price due to Musk’s original offer.
Moving away
There was also the possibility that Musk might have walked. Tobias stated earlier that Musk may have tried to claim that Twitter didn’t honour its contract by allegedly misrepresenting the number of valid users it had.
McClain was similar to McClain. McClain stated that he was sure to be paying a lot to lawyers to find a way around the “ironclad” document he signed.
However, this move could be subject to harsh penalties, Karen Woody, an associate faculty at Washington and Lee University School of Law, who studies securities law, told Insider earlier in the year. Woody stated that he will be sued. “There is a contract here and it’s binding.”
Twitter’s late Friday statement that it would pursue legal action seemed like it was confirming that.
Twitter could sue Musk for the $1 billion termination fee he set in the terms. However, Carnegie Mellon’s Spatt pointed to the fact that $1 billion is less than 2.5% of the total deal value and only a fraction of Musk’s fortune.
Spatt stated that if he is only responsible for the billion, he should just walk away. Spatt stated before the SEC announcement that he believed Spatt should pay the billion to protect his net value.
Twitter could sue him to force him to sign the deal. Twitter could ask a court for enforcement of a “specific performance clause” in deal contracts. This requires that parties do the same as they promised. It could result in Musk fighting the case in court.
