Legal experts say Twitter (TWTR.N) has a strong case against Elon Musk for pulling out of his $44 billion deal to buy the US social media company, however, rather than a lengthy court battle , Twitter could choose to renegotiate or settle with Musk instead of going to court.
The case between the two parties will be heard in Delaware courts, which has made it difficult for acquirers to back out of deals. But three corporate law professors interviewed by Reuters said target companies often choose the certainty of a renegotiated deal at a lower price or financial compensation rather than a messy court battle that can last many months.
Adam Badawi, a law professor at UC Berkeley, said: “The reason to settle for less is that going to court is expensive.” “This is so complicated that it might not be worth it,” he said.
When asked for comment, Twitter and Musk did not immediately respond. Musk’s main claim against Twitter is that the San Francisco-based company broke its contract by failing to give him enough information to back up his claim that less than 5 percent of its active users are spam or fake accounts. Twitter has said it stands by this estimate, but the number of accounts may be higher.
Musk also said in a letter to Twitter on Friday that the company’s lie about the number of spam accounts could be a “material adverse effect (MAE)” that would allow it to back out of the deal.
But legal experts said Delaware courts view MAEs as big, unexpected things that hurt a company’s performance in the long run. Deal contracts like Musk’s and Twitter’s are so specific that a judge ruled an MAE has only been legally activated once in the history of such cases when German healthcare group Fresenius Kabi AG finalized its deal to buy the maker. American generic drug maker Akorn. Inc. in 2018.
In that case, a court said Akorn lied when he told Fresenius it met all of its regulatory requirements. He also discovered that Akorn had kept data on how his performance was getting worse due to whistleblowers.
Legal experts didn’t think having bad numbers for spam accounts would be a MAE for Twitter on the same level as the problems that plagued Akorn.
Ann Lipton, associate dean for faculty research at Tulane Law School, said: “If he goes to court, Musk has to prove that the spam account numbers were not just fake, but so fake they will have a huge effect on Twitter’s earnings in the future”.
Musk also said that Twitter broke its contract by firing two key high-ranking employees, the revenue product leader and the consumer general manager, without their permission, which was required by their contract.
Brian Quinn, a Boston University Law School professor, said, “That’s probably the only claim that carries any weight,” but added that he didn’t think the layoffs were big enough to hurt Twitter’s business.
In 2020, a Delaware court allowed South Korea’s Mirae Asset Capital Co. to pull out of a $5.8 billion luxury hotel deal because the pandemic forced the seller, China’s Anbang Insurance Group, to change the way who generally managed his hotels.
Conciliate instead of litigating to the end
Most of the time, the courts find in favor of the target company and order the acquirer to finalize the deal. This is called “specific performance” and is a legal remedy.
In 2001, Tyson Foods, the largest chicken processor in the United States, decided that it no longer wanted to buy IBP Inc., the largest meatpacker. A judge said the deal had to go through.
But many companies choose to settle with their acquirers so their employees, customers, and suppliers don’t have to worry about what will happen to them in the future.
When the COVID-19 pandemic broke out in 2020 and shook the global economy, this happened more frequently. In one case, French store LVMH (LVMH.PA) threatened to stop doing business with Tiffany & Co. The American jeweler agreed to reduce the price of the deal by $425 million, bringing it down to $15.8 billion.
Simon Property Group Inc. (SPG.N), which runs most of the shopping centers in the US, was able to obtain a majority stake in a competitor, Taubman Centers Inc., for 18% less, or $2.65 billion.
Other companies paid the people who wanted to buy the money to let them go. This includes Channel Medsystems Inc, a company that makes medical technology. Sued Boston Scientific Corp (BSX.N) for trying to back out of a $275 million deal. In 2019, a judge said the settlement should go through, and Boston Scientific paid Channel Medsystems a settlement that was not made public.
Subscribe to our latest newsletter
To read our exclusive content, sign up now. $5/month, $50/year