Remembering July 12, 2022: Twitter Sues Musk After He Tries Backing Out of $44 Billion Deal

 

Remembering July 12, 2022:

Twitter Sues Musk After He Tries Backing Out of $44 Billion Deal

 

The question of whether Elon Musk must buy Twitter, as he agreed to do in April, is headed to a court in Delaware.

 

Twitter sued Elon Musk. He had agreed to buy the company for $44 billion but now wants to terminate the deal.

 

By Kate Conger and Lauren Hirsch

July 12, 2022

https://www.nytimes.com/2022/07/12/technology/twitter-lawsuit-musk-acquisition.html

 

SAN FRANCISCO — Twitter sued Elon Musk on Tuesday to force the billionaire to complete his $44 billion acquisition of the company, setting the stage for a prolonged legal battle over the fate of the social media service.

 

Mr. Musk agreed in April to buy Twitter but declared last week that he intended to walk away from the deal. To push Mr. Musk to abide by the acquisition agreement, Twitter sued him in Chancery Court in Delaware. The court will determine whether he remains on the hook for the purchase or whether Twitter violated its obligation to provide Mr. Musk with data he requested, entitling him to walk away.

 

“Musk refuses to honor his obligations to Twitter and its stockholders because the deal he signed no longer serves his personal interests,” the company said in the suit. “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.”

 

At the heart of the case is the issue of disclosure. To terminate the deal, Mr. Musk claimed that Twitter balked at handing over information about spam bots, also known as fake accounts, on the platform. He repeatedly said he did not believe the company’s public statements that roughly 5 percent of its active users are bots. Twitter intentionally misled the public, he said, and obstructed his efforts to get more information about how it accounts for the figures. Mr. Musk has also taken aim at Twitter for not giving warning before recently firing two key executives.

 

But Mr. Musk signed a legally binding agreement with Twitter. And in that contract, Twitter included a specific performance clause that allows it to sue to force the deal through, so long as the debt that the billionaire has corralled for the acquisition is in place.

 

In a letter to Mr. Musk’s lawyers on Sunday, Twitter’s lawyers said that his move to terminate the deal was “invalid and wrongful” and that Mr. Musk “knowingly, intentionally, willfully and materially breached” his agreement to buy the firm. The company has said that it is confident in its figures about spam accounts, and that it uses experts in spam to audit the count and ensure its accuracy.

 

In its suit, Twitter argued that Mr. Musk, who also leads the automaker Tesla, wanted to exit the deal because of changes in the stock market that affected his wealth. (Tesla’s stock has fallen in recent months.) Twitter said the billionaire used his complaints about bots as a pretext to wriggle out of the agreement.

 

Mr. Musk also broke an agreement not to publicly insult Twitter executives and he “covertly abandoned” his efforts to secure debt funding for the deal, the lawsuit said. In doing so, the social media company said he breached his obligations to use “reasonable best efforts” to get a deal done.

 

Sean Edgett, Twitter’s general counsel, informed employees of the suit in an internal memo on Tuesday and said the company had also “filed a motion for an expedited trial alongside the complaint, asking for the case to be heard in September, as it is critically important for this matter to be resolved quickly.”

 

Twitter’s chief executive, Parag Agrawal, wrote in response, “We took this opportunity to tell our story and defend our company, our people and our stockholders,” adding: “We plan to hold the buyer fully accountable to fulfill his contractual obligations. We will prove our position in court, and we believe we will prevail.” The New York Times obtained both memos.

 

Twitter is seeking a four-day trial this September. The deal has a deadline of Oct. 24 to be completed. Should the transaction still be awaiting regulatory approval at that time, Mr. Musk and Twitter would have another six months to close it.

 

Brian J.M. Quinn, a professor at Boston College Law School, said Twitter’s legal arguments were strong. He noted that Mr. Musk’s tweets were peppered throughout the lawsuit, including one that the billionaire sent before signing the deal that showed he was aware of spam on Twitter. Mr. Musk had tweeted, “we will defeat the spam bots or die trying.”

 

“His lawyers are going to be very unhappy with the fact that he tweets,” Mr. Quinn said of Mr. Musk. “All the tweets that they can find, they are using against him.”

 

Still, Mr. Musk’s threat of walking away could bring Twitter back to the negotiating table, allowing the billionaire to buy the company at a discount. The two sides could also settle with Mr. Musk paying damages to Twitter. Or he could pay a $1 billion breakup fee and walk away, an option allowed only under certain circumstances, such as if Mr. Musk’s financing fell through.

 

If Mr. Musk successfully disentangles himself from Twitter, it could be disastrous for the company. Its stock has fallen more than 35 percent below his offer of $54.20 per share. Twitter’s business has also deteriorated in recent months. In May, Mr. Agrawal said in a memo to employees that the company had not lived up to its business and financial goals.

 

Now that Twitter has sued, Mr. Musk and his lawyers are expected to respond. While the timeline beyond then depends on many factors, the company and Mr. Musk will most likely be called to a hearing in Delaware and go through the discovery process, with the two sides digging up facts they believe are relevant to the case.

 

The case may then move to a trial, though there is a chance the judge assigned to the case will dismiss Mr. Musk’s efforts to walk away. If the suit proceeds to trial, the judge will decide whether Twitter’s disclosures were insufficient and constituted a material harm to the deal.

 

In the past, Delaware’s Chancery Court has prevented companies from trying to walk away from deals. In 2001, for example, when Tyson Foods tried to back out of an acquisition of the meatpacker IBP, the court ruled that Tyson had to follow through with the agreement. In situations where the court has allowed buyers to exit, it has required them to pay damages. By most readings of Twitter’s contract with Mr. Musk, damages would be capped at $1 billion.

 

Twitter and Mr. Musk have assembled legal teams to duke it out. Leading Twitter’s efforts in Delaware is William Savitt, a lawyer at Wachtell, Lipton, Rosen & Katz. Wachtell Lipton is famous for, among other things, developing legal tactics to protect companies from hostile buyers, like the so-called poison pill that Twitter originally put in place to defend itself against Mr. Musk.

 

Mr. Savitt has experience before Delaware’s Chancery Court and previously defended companies against the likes of Carl Icahn and Pershing Square, the investment firm run by the billionaire William Ackman. But Mr. Musk is unlike any other corporate raider who preceded him, making him a particularly complex opponent.

 

Mr. Musk’s legal team includes his personal lawyer, Alex Spiro, plus his partners at the law firm Quinn Emanuel and lawyers from Skadden, Arps, Slate, Meagher & Flom. Skadden is a go-to corporate law firm, with ample experience arguing cases in front of the Delaware court, including the attempt by the luxury giant LVMH Moët Hennessy Louis Vuitton to break up its $16 billion deal to acquire Tiffany & Company. Skadden’s client, LVMH, ultimately shaved about $420 million off its purchase price.

 

Mike Isaac contributed reporting. Jack Begg contributed research.

 

 

Lauren Hirsch joined the New York Times from CNBC in 2020, covering business, policy and mergers and acquisitions.  Ms. Hirsch studied comparative literature at Cornell University and has an M.B.A. from the Tuck School of Business at Dartmouth. More about Lauren Hirsch