Twitter Takes Elon Musk to Court, Experts Say Company Has the Upper Hand

Twitter demanded that Elon Musk complete his proposed $44 billion acquisition of the company.

(Photo: Altered by The Quint)

Twitter on Tuesday, 12 July, sued Tesla CEO Elon Musk for ending his $44 billion acquisition of the social media company.

US-based law firm Wachtell, Lipton, Rosen & Katz will represent the Twitter in a court in Delaware, where the company is registered, Reuters reported.

Musk on Friday, 8 July, terminated his $44 billion deal to buy Twitter, accusing the tech company of making "false and misleading representations" about how many bots were on its platform.

Twitter hit back, calling Musk's withdrawal "invalid and wrongful" and insisting that it had breached none of its obligations under the agreement.

"Musk apparently believes that he – unlike every other party subject to Delaware contract law – is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away," the lawsuit reportedly says.

Twitter's chairperson Bret Taylor said he is confident the company will prevail in court. Experts seem to agree.

Why Twitter Might Have the Edge

John Coffee of Columbia Law School told the Financial Times that he was "confident" that the Delaware courts would hold Elon Musk accountable. "The law is fairly clear that you cannot pull out from a deal in the manner he is seeking," he said.

Musk's agreement with Twitter contains language that allows him to walk away only if Twitter’s securities filings are inaccurate enough to have a 'material adverse effect' (MAE) on the company.

"That is an incredibly high standard: Delaware courts have almost never found an MAE. There is a rule of thumb that an MAE requires a 40 percent decrease in long-term profitability," legal columnist Matt Levine wrote in a column for Bloomberg.

In fact, the Delaware courts have allowed a company to back out of a deal using MAE only once before. Such legal battles usually end in re-negotiations or settlements, according to a Reuters report.

"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," Ann Lipton, a professor at Tulane Law School, told the agency.

This means that Musk might have to rely on other arguments to back out of this deal.

Musk's 'Credibility Problem'

In his letter to Twitter, Musk put forward three arguments for why he was terminating the deal. These are likely to surface in court.

• Twitter failed to provide much of the data he had requested regarding spam and fake accounts. Whatever information was provided came with strings attached and was "minimally useful" to Musk and his team in planning for the transaction.

• The merger agreement appears to contain "materially inaccurate representations". Musk’s advisors went through the information provided by Twitter and believe that the number of spam and fake accounts is dramatically higher than the 5 percent stated by Twitter.

• Twitter's firing of two high-ranking employees, its Revenue Product Lead and the General Manager of Consumer, as well as announcing that it was laying off a third of its talent acquisition team, flouts its obligation to "conduct its business in the ordinary course," mentioned in the deal.

“Musk will have to prove these are real breaches of the agreement. But because his conduct up until now so brazenly demonstrated he was looking for any excuse to back out, he’s going to start the case with a serious credibility problem,” Lipton told Financial Times.

Brian Quinn, a professor at Boston College Law School, believes that the firing of two key employees and other layoffs is "probably the only claim that has any purchase" even if they aren't serious enough to affect Twitter's business, he told Reuters.

What Happens if Twitter Wins?

Even if Twitter wins the lawsuit, the court might not force Musk to buy the platform. The Judge might instead ask Elon Musk to pay monetary damages, some experts believe.

“It’s very daunting to order specific performance in a situation like this. There’s external financing that has to be made to perform. And what if Musk flouts your order? It turns into a showdown over the court’s jurisdiction and power, what happens at ground level?” Morgan Ricks, law professor at Vanderbilt tweeted.

Specific performance refers to when a court orders a party to perform a specific act – in this case, purchasing a company at the agreed price.

Ricks also notes that the two sides could settle at a lower price instead of subjecting themselves to a lengthy and expensive court battle.

"A re-cut deal is very possible but its price will of course hinge crucially on the parties' estimates of the likelihood that the court would grant specific performance – negotiations will take place in the shadow of these predictions," he wrote.

(With inputs from Financial Times, Reuters, and Bloomberg)