Elon Musk vs Twitter saga: With court battle in offing, a look at possible outcomes

Elon Musk’s announcement that he wants out of his deal to purchase Twitter and the social media company vowing to take the Tesla CEO to court to fulfil his end of the bargain has left everyone wondering – what happens next?

The unravelling of the acquisition was just the latest twist in a saga between the world's richest man and one of the most influential social media platforms, and it may portend a titanic legal battle ahead.

Also read: How Elon Musk's Twitter bid may have been a smokescreen to liquidate Tesla stocks

Twitter could have pushed for a $1 billion breakup fee that Musk agreed to pay under these circumstances. Instead, it looks ready to fight to complete the purchase, which the company's board has approved and CEO Parag Agrawal has insisted he wants to consummate.

What Musk said

In a letter to Twitter's board, Musk lawyer Mike Ringler complained that his client had for nearly two months sought data to judge the prevalence of "fake or spam" accounts on the social media platform.

"Twitter has failed or refused to provide this information. Sometimes Twitter has ignored Musk’s requests, sometimes it has rejected them for reasons that appear to be unjustified, and sometimes it has claimed to comply while giving Musk incomplete or unusable information," the letter said.

Musk also said the information is fundamental to Twitter's business and financial performance, and is needed to finish the merger.

What Twitter said

In response, the chair of Twitter's board, Bret Taylor, tweeted that the board is "committed to closing the transaction on the price and terms agreed upon" with Musk and "plans to pursue legal action to enforce the merger agreement. We are confident we will prevail in the Delaware Court of Chancery."

The trial court in Delaware frequently handles business disputes among the many corporations, including Twitter, that are incorporated there.

Court battle ahead and possibile outcomes

As per Reuters, disputed mergers and acquisitions that land in Delaware courts more often than not end up with the parties re-negotiating deals or the acquirer paying the target a settlement to walk away, rather than a judge ordering that a transaction be completed.

"This is a disaster scenario for Twitter and its board," Wedbush analyst Dan Ives wrote in a note to investors. He predicted a long court fight by Twitter to either restore the deal or get the $1 billion breakup fee.

"This whole process has been bizarre," said Christopher Bouzy, founder of research firm Bot Sentinel, which tracks fake Twitter accounts used for disinformation or harassment. "He knew about this problem. It's odd that he would use bots and trolls and inauthentic accounts as a way of getting out of the deal."

On the other hand, Bouzy said, the letter from Musk's legal team makes some valid critiques of Twitter's lack of transparency, including its apparent refusal to provide Musk with the same level of internal data it offers some of its big customers.

"It just seems as if they're hiding something," said Bouzy, who also believes the number of fake or spam Twitter accounts is higher than what the company has reported.

“The outcomes are: The court says Musk can walk away,” David Larcker, a professor of accounting and corporate governance at Stanford University, told The New York Times. “Another outcome is that he is forced to go through with the deal, and the court can enforce this. Or there might be some middle ground where there’s a price renegotiation.”

As per The New York Times, Twitter’s trump card is a “specific performance clause” that gives the company the right to sue Musk and force him to complete or pay for the deal, so long as the debt financing he has corralled remains intact.

Examples of such forced acquisitions include –  In 2001, Tyson Foods tried to back out of an acquisition of meatpacker IBP, pointing to IBP’s financial troubles and accounting irregularities. A Delaware court vice chancellor ruled that Tyson had to complete the acquisition.

However, legal authority is different from practical reality. A lawsuit will probably cost millions in legal fees, take months to resolve and add further uncertainty to already jittery employees.

Deal disagreements have often ended in settlements or renegotiations on price. In 2020, luxury giant LVMH Moët Hennessy Louis Vuitton attempted to break up its $16 billion deal to acquire Tiffany & Co., ultimately securing a discount of about $420 million, the newspaper reported.

“This stuff is a bargaining move in an economic transaction,” Charles Elson, a recently retired professor of corporate governance at the University of Delaware told the newspaper. “It’s all about money.”

But some are wondering if Musk is simply making an excuse to undo the deal.

 

Washington Post national correspondent Philip Bump told CNN it's hard to say what his true motives are but did concede that Musk is an "eccentric character."

"I'm sort of fascinated by the repercussions of his announcement that it very quickly became entangled in American politics," Bump said.

Meanwhile, Business Insider's chief media correspondent Claire Atkinson told CNN it remains to be seen what impact the entire saga has on Twitter. "If you're considering advertising on the platform, you want to know 'Is this product suitable?'" Atkinson said. "And what are their rules?"

Twitter vs Musk drama

Much of the drama surrounding the deal has played out on Twitter, with Musk — who has more than 100 million followers — lamenting that the company was failing to live up to its potential as a platform for free speech.

On Friday, shares of Twitter fell 5 per cent to $36.81, well below the $54.20 that Musk agreed to pay. Shares of Tesla, meanwhile, climbed 2.5 per cent to $752.29. After the market closed and Musk's letter was published, Twitter's stock continued to decline while Tesla climbed higher.

On Thursday, Twitter sought to shed more light on how it counts spam accounts in a briefing with journalists and company executives. Twitter said it removes 1 million spam accounts each day. The accounts represent well below 5 per cent of its active user base each quarter.

To calculate how many accounts are malicious spam, Twitter said it reviews "thousands of accounts" sampled at random, using both public and private data such as IP addresses, phone numbers, location and account behaviour when active, to determine whether an account is real.

Last month, Twitter offered Musk access to its "fire hose" of raw data on hundreds of millions of daily tweets, according to multiple reports at the time, though neither the company nor Musk confirmed that.

One of the chief reasons Musk gave for his interest in taking Twitter private was his belief he could add value to the business by getting rid of its spam bots — the same problem that he's now citing as a reason to end the deal.

Musk's lawyer also alleged that Twitter broke the agreement when it fired two top managers and laid off a third of its talent-acquisition team.

The sale agreement, he wrote, required Twitter to "seek and obtain consent" if it deviated from conducting normal business. Twitter was required to "preserve substantially intact the material components of its current business organisation," the letter said.

Musk's flirtation with buying Twitter appeared to begin in late March. That's when Twitter said he contacted members of its board — including co-founder Jack Dorsey — and told them he was buying up shares of the company and was interested in either joining the board, taking Twitter private or starting a competitor.

Then, on 4 April, he revealed in a regulatory filing that he had become the company's largest shareholder after acquiring a 9 per cent stake worth about $3 billion.

At first, Twitter offered Musk a seat on its board. But six days later, Agrawal tweeted that Musk would not be joining the board after all. His bid to buy the company came together quickly after that.

When Musk agreed to buy Twitter for $54.20 per share, he inserted a "420" marijuana reference into his price. He sold roughly $8.5 billion worth of shares in Tesla to help fund the purchase, then strengthened his commitments of more than $7 billion from a diverse group of investors including Silicon Valley heavy hitters like Oracle co-founder Larry Ellison.

Inside Twitter, Musk's offer was met with confusion and falling morale, especially after Musk publicly criticised one of Twitter's top lawyers involved in content-moderation decisions.

Groups opposing the takeover from the outset — including those advocating for women, minorities and LGBTQ people — cheered Friday's news.

"Despite what Musk may claim, this deal isn't ending because of Twitter bots or spam accounts. This deal is collapsing because of Elon Musk's own erratic behaviour, embrace of extremists and bad business decisions," said Angelo Carusone, president of Media Matters, a left-leaning nonprofit watchdog group that's been critical of Musk's Twitter bid.

Musk, he said, "made it clear that he would roll back Twitters' community standards and safety guidelines, which would turn the platform into a fever swamp of dangerous conspiracy theories, partisan chicanery and white supremacist radicalisation."

With inputs from agencies

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