Twitter may only have ‘bad options’ in battle with Elon Musk, analysts say

First, Elon Musk wanted to buy Twitter, but it wasn’t clear if the company would be on board.

Then the two sides agreed to a staggering $44 billion settlement.

Now, Musk wants out of the deal and Twitter is suing to stop him.

Less than three months after Musk and Twitter agreed to the billion-dollar takeover, the two parties appear to be destined to determine the fate of the settlement in court.

No matter the outcome of the case, one thing seems certain: Twitter will have to continue to face a painful amount of uncertainty for its business and employees because of Musk.

The billionaire decided to terminate the takeover deal last week, claiming that Twitter violated the deal by failing to hand over data he says he needs to assess the number of bots and spam accounts on the platform.

This week, Twitter retaliated with a more than 60-page lawsuit that accuses Musk, not the company, of violating the agreement and seeks to force him to comply with the agreement.

Many mergers and acquisitions experts agree that Twitter has the strongest legal case.

Twitter alleges in its lawsuit that with funding commitments to the deal still intact, with no apparent issues with regulatory approval and the company’s own cooperation, Musk has no standing to back out of the deal.

But a stronger possible legal argument doesn’t necessarily mean Twitter is on a solid footing in other ways.

Twitter was already struggling to grow its advertising business and user base before Musk got involved. Like other tech companies, it too is trying to cut costs amid rampant inflation and fears of a recession.

With the lawsuit, the company is poised to enter a legal battle with the world’s richest man that risks dragging on for months. (Twitter filed a motion for expedited handling of the case, requesting a four-day trial in September.)

If it prevails, Twitter could effectively force a billionaire who, according to its own complaint, has repeatedly belittled “Twitter and its staff” to become its new owner.

It’s a strange conundrum for the company — especially after its users and employees have voiced concerns about Musk as an owner — but as the deal price of $54.20 a share represents a huge premium over Twitter’s current stock price , Twitter’s board has a duty to shareholders to try to close the deal, or at least get as much money out of Musk as possible.

And the only way a court can rule in your favor is if Twitter shows it is making a good faith effort to complete the settlement.

Alternatively, Twitter could negotiate a lower price for the deal or a deal that allows Musk to walk away — and hope his shareholders don’t disapprove.

Or Musk could win and walk away, leaving Twitter with nothing, or worse.

Deal or no, Musk remains one of Twitter’s biggest shareholders, but that could also change if he chooses to wash his hands of the company, with potential ripple effects for the company’s other shareholders.

Meanwhile, the company is left with distracted leadership and demoralized employees, as well as users, advertisers and shareholders unclear about the future of the platform.

“It’s hard to imagine how the company will come together and move forward,” regardless of how the lawsuit is resolved, said Carl Tobias, a professor at the University of Richmond School of Law.

“It may not have a very happy resolution, unfortunately.”

Twitter declined to comment on this story. Musk has not commented directly on the lawsuit, but shortly after it was filed, he tweeted “Oh what an irony lol.”

Preparing for a “messy” legal battle

In a letter seeking to end the deal, Musk’s legal team hinted at their likely arguments in the case.

In addition to its claims that Twitter has failed to live up to its information sharing obligations, the letter alleges (without providing evidence) that the company’s public statements that fake and spam accounts account for about 5% of its monetizable daily active users. were false or misleading.

“What he seems to be looking for here is an exit ticket to get out of the car and walk away for nothing,” said Eric Talley, a professor of corporate law at Columbia Law School.

But, he added, those arguments can be difficult to sustain in court. “They all have a positive thinking tone.”

In particular, Musk’s claim that he relied on Twitter’s misleading public statements about bots in making the deal “flies in the face of all his behavior that led to the transaction,” Talley said.

Twitter noted this in its lawsuit, pointing to Musk’s public statements about wanting to buy the company so he could “defeat the spam bots.”

Essentially, it’s hard for Musk to argue that he didn’t know about Twitter bots when he explicitly said that was the reason he bought the company in the first place.

Twitter’s complaint also alleges that on April 9, the day Musk said he wanted to buy Twitter rather than join the board, Musk sent a message to Twitter chairman Bret Taylor.

In his text, Musk allegedly said that “’purging fake users’ from the platform had to be done in the context of a private company, because he believed it would ‘make the numbers look terrible’”.

Twitter’s lawsuit also dispels the idea that it resisted sharing information with Musk.

In addition to delivering their “firehose” of data about tweets on the platform and “a detailed summary” of their bot measurement process, Twitter representatives also held several meetings with Musk’s team and offered the opportunity to others, which Musk declined. or ignored.

Legal experts note that the original acquisition agreement gives Twitter significant leeway to determine whether requests for information are “reasonable” and tied to the conclusion of the deal, and to deny them if they could harm the company competitively.

Musk also claims that Twitter violated an agreement to operate its business as normal before the merger, firing two executives and announcing layoffs of a portion of its recruiting team.

Twitter, however, noted in its complaint that while Musk requested a clause requiring Twitter to seek his consent before making such changes to its workforce, “Twitter successfully reached that clause before signing” the agreement. .

Additionally, Twitter alleges that it tried to introduce employee retention programs, but Musk blocked them from being implemented.

Musk will largely bear the burden of proving that he didn’t simply “wake up with a massive financial hangover” and that his allegations are not a pretext for getting out of the deal, according to Talley.

“It’s going to be a very messy litigation,” said Kenneth Henderson, partner at law firm Bryan Cave Leighton Paisner.

“How long can Twitter last?”

Ultimately, the court will examine whether or not there was a breach of contract, whether by Musk or Twitter.

If he sides with Musk and finds that Twitter violated the deal, it could allow the billionaire to step aside and potentially sue the company for damages, experts say.

But if the court sides with Twitter and finds that Musk’s exit attempts amount to a breach of the agreement, Twitter has the right to ask the court, as it does in its lawsuit, for a specific performance, a remedy in which Musk would receive an injunction that would force him to close the deal.

While specific performance clauses are often included in large business takeover contracts, they generally do not need to be enforced, meaning the court will have limited precedent to base its assessment of the case between Twitter and Musk, according to Henderson.

There is some public debate as to whether the Delaware Chancery Court, where the case was filed, will be willing to grant specific execution in this case, given Musk’s unpredictable nature and the possibility that he may not abide by the ruling.

“Delaware courts, courts everywhere, are very concerned about issuing a decision or issuing an order that is ignored … it reflects poorly on the court,” Carolyn Berger, former vice chancellor of the Delware Chancery Court, told CNBC. on Wednesday.

Still, Talley said he doesn’t think the court would shy away from ordering such a remedy if it finds that Musk’s attempt to walk away violates the settlement.

“The court usually doesn’t blink in cases where you’ve signed up for a deal and feel the buyer’s remorse and try to walk away, the only action and trade we have as a court system is our willingness to enforce the contracts. So let’s do it,” Talley said.

Such a move could create an entirely new state of uncertainty for Twitter. If Musk complied with an order to complete the deal, shareholders would receive their payment.

But the company, along with its employees and customers, would be left in the hands of an owner who has said he doesn’t want it and who has already stated plans to review key aspects of how Twitter operates.

But even someone with as much money as Musk might not be able to just ignore even this court ruling.

If Musk tried to ignore the court order and continued to flout his obligations under the agreement, the court could try more extreme measures — such as potentially confiscating assets like Tesla stock — to get him to comply.

Perhaps the best Twitter can hope for, if the case goes in its favor, is for Musk to agree to a hefty settlement to avoid being forced by the court to take over the company he no longer wants — and to do so as quickly as possible to eliminate the cloud of uncertainty.

“It’s hard to imagine the solution being to force Musk to buy Twitter, even if the court was willing to do so, given what happened under the bridge,” Tobias said.

In the original deal, Twitter and Musk set a $1 billion separation fee if the deal fell apart.

But given the circumstances, some say the company would likely expect a higher payout.

“Twitter is not necessarily a litigator to go all the way and get a court order forcing Musk to shut down,” Henderson said.

“They are litigating to position Twitter in the best place to get as much money out of Musk as they can.”

Another likely reason for Twitter to give in: It doesn’t have time on your side.

“My feeling is that Twitter has a better position legally,” said Henderson.

But, he added, “in practice, I don’t think Twitter can win a war of attrition… Twitter is out there, not in great shape to begin with, with total uncertainty about what’s going to happen, already weakened. Now the question is, how long can it last?”