Now that Elon Musk has mentioned that he doesn’t want to buy Twitter Inc., he can’t just step away from the $44 billion worth of contract. The billionaire co-founder of Tesla Inc. will need to present his case before a judge in Delaware that Twitter failed to keep its side of a merger deal agreed in April. If history is any indication, his job proving this won’t be easy.
Twitter Chairman Bret Taylor certified on Friday that the social media platform will fight in the Delaware Court of Chancery to drive Elon Musk to follow through on his agreement, and the company has lawyered up in a race to sue the Billionaire. People familiar with the matter suggested that a lawsuit could come as soon as early this week.
If the judge rules against Elon Musk, he could well be obliged to pay Twitter shareholders $54.20 a share, as he communicated he would in the accord announced back on April 25. A ruling in his favor would let him part ways with the deal, though he will probably have to pay a break-up fee, initially set at around $1 billion. There’s also the possibility that both sides reach a settlement whereby Musk still makes the purchase, potentially at a lower price.
The judge, in this case, will zero in near on the densely worded complexities of the 73-page acquisition agreement, and the court has rarely sided with parties who, like Elon Musk and are attempting to bail on acquisition commitments.
Musk’s explanation centers on automated user accounts known as bots and how Twitter shows support for them. He alleges that the social media platform is swarming with spam bots, arguing Twitter’s contention that they make up less than 5% of total users. Elon Musk stated in his Friday filing with the US Securities and Exchange Commission that Twitter’s delinquency to properly hand over specifics on the number of bots amounts to what’s comprehended as a company material adverse effect [MAE], A judge must determine whether such an event has transpired and whether it explains Musk’s cancellation.
Larry Hamermesh, a University of Pennsylvania law professor who specializes in Delaware corporate law disputes, describes an MAE as an “unexpected, fundamental, permanent” negative development — akin to blowing a hole in the transaction that can’t be fixed.
So far, Delaware courts have encountered only one case in which a clear MAE appeared- Fresenius SE’s $4.3 billion buyout bid in 2018 for rival drugmaker Akorn Inc. A judge sanctified Fresenius’ decision to walk away from the deal after uncovering Akorn executives concealed an array of problems that cast doubt on the validity of data backing up approval for some drugs and the profitability of its operations.
Forcing Elon Musk’s Hand
The agreement also provides Twitter officials so-called specific-performance rights, which means that if the judge finds Elon Musk’s fusses about the bot’s data don’t rise to the level of an MAE, the platform can request to the judge that Musk proceeds with the buyout.
Elon Musk’s judgment to sign the deal without doing due diligence could work against him, said Robert Profusek, head of the mergers and acquisitions department at law firm Jones Day. He also mentions that when you don’t do diligence and test things out later simply isn’t the way things work in big-ticket M&A and, if accepted, would put shareholders at risk.
Delaware chancery court judges are known for their expertise in decoding what may look and sound to the layperson as a maze of legal terminology that strives to outline both sides’ rights and obligations in a merger and acquisition deal.
In the Twitter deal, the platform’s executives are bound to promptly furnish Musk with all information regarding the business, properties, and personnel of the company and its subsidiaries as may reasonably be requested. Elon Musk reasons that management hasn’t met those commitments in connection with the details of spam and bot accounts.
Twitter said it has passed over comprehensive data on its user base. Executives told media outlets on Thursday that the company manually reviews thousands of accounts each quarter to specify the 5% spam bot tally, and gauges that the actual number is well below the threshold revealed in filings. The company utilizes internal data, such as examining phone numbers or Internet Protocol addresses, the unique set of characters linked with a computer or other device, to help determine whether an account is run by a human.
The agreement also illustrates a “company material adverse effect,” as “any change, event, effect or circumstance which, individually or in the aggregate, has resulted in or would reasonably be expected to result in a material adverse effect on the business, financial condition or results of operations of the company and its subsidiaries.”
What’s an MAE anyway, and why does it matter for Elon Musk?
A likely outcome is that the parties reach an out-of-court compromise. Musk’s action to pull the plug on the deal is presumably nothing more than a negotiating scheme, as per Charles Elson, a retired University of Delaware professor and former head of the school’s Weinberg Center for Corporate Governance.
As per the information, Twitter has employed merger law heavyweight Wachtell, Lipton, Rosen & Katz. The social media company seeks to file suit early this week, expressed the people, who declined to be identified because the matter is confidential. Hiring Wachtell, it gains access to lawyers including Bill Savitt and Leo Strine, who served as Chancellor of the Delaware Chancery Court.
Elon Musk has fetched the services of Quinn Emanuel Urquhart & Sullivan LLP. The firm led his successful defense against a defamation lawsuit in 2019 and is representing him as part of a continuous shareholder lawsuit over his failed endeavor to take Tesla private in 2018.
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