Twitter Has Legal Edge In USD 44 Billion Deal Dispute With Elon Musk, May Opt For Renegotiation: Report

Elon Musk's main claim against Twitter is that the US social media 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.

Wilmington: Billionaire entrepreneur Elon Musk on Friday said he was terminating the $44 billion deal to buy the microblogging site Twitter in what could be the start of months of legal wrangling. However, backing off from the deal might not be a cakewalk for Musk as Twitter board has planned to pursue legal action to enforce the merger agreement, and according to legal experts, the scales are tipping in the social media giant’s favour.

However, thought Twitter Inc has a strong legal case against Musk walking away from the deal, it could opt for a renegotiation or settlement instead of a long court fight, news agency Reuters reported quoting legal experts.

As per the report, 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 interviewed by Reuters said.

Experts’ opinion

“The argument for settling at something lower is that litigation is expensive,” Reuters quoted Adam Badawi, a law professor at UC Berkeley. “And this thing is so messy that it might not be worth it.”

Twitter and Musk spokespeople did not immediately respond to requests for comment by the news agency.

Musk’s Claim

Elon Musk’s main claim against Twitter is that the US social media 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 the San Francisco-based company 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.

Scales tipping in Twitter’s favour

According to Reuters’ report, legal experts are of the opinion that Delaware courts view MAEs as dramatic, unexpected events that cause long-term harm to a company’s performance.

Deal contracts like 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 AG ending its deal for U.S. generic drugmaker’s Akorn Inc in 2018.

In that case, a court reportedly 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 whistleblower allegations.

Legal experts were also 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’s possible way out of deal

Musk another claimed to back out of the deal is that Twitter breached their agreement by firing two key high-ranking employees, its revenue product lead and general manager 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 told Reuters, 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 Co 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.