Twitter has a strong legal case against Elon Musk walking away from his US$44-billion deal to acquire the US social media company but could opt for a renegotiation or settlement instead of a long court fight, according to legal experts.
Delaware courts, where the dispute between the two sides is set to be litigated, have set a high bar for acquirers being allowed to abandon their deals. But 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 for many months, three corporate law professors said.
“The argument for settling at something lower is that litigation is expensive,” said Adam Badawi, a law professor at UC Berkeley. “And this thing is so messy that it might not be worth it.”
Twitter and Musk spokesmen did not immediately respond to requests for comment.
Musk’s main claim against Twitter is that the San Francisco-based company breached their deal because it will not share with him enough information to back up its claim that spam or fake accounts constitute less than 5% of its active users. Twitter has stood by this estimate but also said it’s possible the number of these accounts is higher.
Musk also said in a letter to Twitter on Friday that the company’s misrepresentation of the number of spam accounts might be a “material adverse effect (MAE)” that would allow him to walk away under the terms of the deal contract.
But legal experts said Delaware courts view MAEs as dramatic, unexpected events that cause long-term harm to a company’s performance. Deal contracts such as the one between Musk and Twitter are so prescriptive that a judge has ruled that an MAE has validly been triggered only once in the history of such litigation — in the case of German healthcare group Fresenius Kabi ending its deal for US generic drugmaker’s Akorn in 2018.
Dismissive
In that case, a court ruled that Akorn’s assurances to Fresenius that it was in compliance with its regulatory obligations were inaccurate. It also found that Akorn had withheld facts about its deteriorating performance that emerged in whistle-blower allegations.
Legal experts were dismissive of the idea that inaccurate spam account numbers would amount to an MAE for Twitter on the same level as the problems that plagued Akorn.
“If it goes to court, Musk has the burden to prove more likely than not, that the spam account numbers not only were false, but they were so false that it will have significant effect on Twitter’s earnings going forward,” said Ann Lipton, associate dean for faculty research at Tulane Law School.
Musk also claimed that Twitter breached their agreement by firing two key high-ranking employees, its revenue product lead and GM of consumer, without his consent as required by their contract.
“That’s probably the only claim that has any purchase,” said Brian Quinn, a professor at Boston College Law School, but he added he did not believe the firings were serious enough to affect Twitter’s business.
In 2020, the Delaware court allowed Mirae Asset Capital of South Korea to walk away from a $5.8-billion luxury hotel deal because the pandemic caused the seller, Anbang Insurance Group of China, to alter its ordinary course hotel operations.
Most of the time, the courts find in favour of the target companies and order acquirers to complete their deals — a legal remedy known as “specific performance.”
In 2001, for example, Tyson Foods, the largest US chicken processor, decided it no longer wanted to buy the largest meatpacker, IBP. A judge ordered that the deal be completed.
Many companies, however, choose to settle with their acquirers to end uncertainty about their future that can weigh on their employees, customers and suppliers.
This happened more frequently when the Covid-19 pandemic broke out in 2020 and delivered a global economic shock. In one instance, French retailer LVMH threatened to walk away from a deal with Tiffany & Co. The US jewellery retailer agreed to lower the acquisition price by $425-million to $15.8-billion.
Simon Property Group, the biggest US mall operator, managed to cut its purchase price of a controlling stake in rival Taubman Centers by 18% to $2.65-billion.
Other companies let the acquirers walk away in exchange for financial compensation. That includes medical technology firm Channel Medsystems, which sued Boston Scientific for trying to walk away from their $275-million deal. In 2019, a judge ruled the deal should be completed and Boston Scientific paid Channel Medsystems an undisclosed settlement. — Tom Hals, with Hyn Joo Jin and Krystal Hu, (c) 2022 Reuters
