Elon Musk, the CEO of Tesla and SpaceX.
Jonathan Newton/The Washington Post via Getty Images
Elon Musk’s deal to buy Twitter could be on shaky ground, the Washington Post reported.
Experts now say there are two likely outcomes: a price renegotiation or Musk trying to back out.
But Musk could face an ugly legal battle and a hefty fine if he attempts to walk away.
If Elon Musk doesn’t follow through on his $44 billion deal to buy Twitter, he could be setting himself up for a big legal fight — and potentially a $1 billion breakup fee.
That’s because he’s already signed on the dotted line to buy the company, which he did after waiving the option to evaluate Twitter’s business in advance. Even though his camp is making noise about the number of allegedly fake accounts, Musk doesn’t have many ways to wriggle out of the deal, experts told Insider.
The Washington Post reported Thursday that Musk’s bid was in jeopardy following his attempts to verify Twitter’s data on spam accounts. People familiar with the matter told the Post that Musk’s camp was unable to verify Twitter’s assertion that fewer than 5% of the accounts on its platform are bots, which could lead Musk to take “drastic” action, the Post reported.
Representatives for Musk did not immediately respond to Insider’s request for comment on the report.
For its part, Twitter in a statement to Insider said it would continue to assume the deal will close.
“Twitter has and will continue to cooperatively share information with Mr. Musk to consummate the transaction in accordance with the terms of the merger agreement,” the statement said. “We intend to close the transaction and enforce the merger agreement at the agreed price and terms”
‘A very hard legal claim to win’
Contracts are structured to give sellers certainty, with protections built in to ensure the deal goes through, barring any so-called material adverse effects.
Though Musk has raised concerns that the true number of Twitter bots could jeopardize the deal, Delaware courts have imposed a very high bar for what constitutes a “material adverse effect” that would allow a buyer to exit a deal, said Brian Quinn, associate professor at the Boston College Law School. (Many companies are registered in Delaware because of the state’s business-friendly legal system.)
“Generally with these kinds of deals, once you’ve signed the contract, absent government intervention or an over-bidder, or some material adverse event between signing and closing, these deals will close,” Quinn said, calling a material adverse event a “very hard legal claim to win.”
Twitter’s board has indicated plans for a shareholder meeting this summer to vote on the deal. A date for the vote hasn’t been set yet, Twitter confirmed.
Meanwhile, there’s evidence to suggest Musk’s camp is trying to renegotiate the deal, Quinn said. “This is all a classic tactic to put more pressure on the company” — in Musk’s case perhaps to put pressure on Twitter to accept a lower price.
In a note to clients, Wedbush analyst Dan Ives predicted three possible outcomes: the deal going ahead as planned, a renegotiation of the sale price, or Musk walking away from the deal altogether.
Still, Ives said it’s unlikely the deal will go ahead with a $54.20-a-share price — a number he called “essentially out the window.” Twitter’s shares closed Friday at $36.81, so many analysts now say Musk would be overpaying. According to Ives, the price could come down to the $42 to $45 per share range.
Renegotiating
John McClain, a portfolio manager at Brandywine Global Investment Management, told Insider that Musk could negotiate the price lower by making a case that Twitter’s value has deteriorated due to the impending recession — an issue Musk has been vocal about in recent months.
Twitter may have reasons of its own for being open to renegotiating, according to Chester Spatt, a professor of finance at Carnegie Mellon University’s Tepper School of Business and a former chief economist at the Securities and Exchange Commission.
“The Twitter folks may think they’re going to prevail in court, but they want to resolve the uncertainty,” he said. “Or they feel that rather than incurring the costs [of a legal battle] that they maybe concede a little bit to help Musk save face.”
Still, some observers are skeptical that a renegotiation is possible. Carl Tobias, Williams Chair in Law at the University of Richmond, told Insider he thinks Twitter will oppose lowering the price given the high value of Musk’s initial offer.
Walking away
Then, of course, there’s the chance that Musk walks. Tobias said that Musk might try to argue that Twitter hasn’t upheld its part of the contract by allegedly misrepresenting how many valid users it has.
McClain took a similar view. “I’m sure he’s paying a lot of lawyers a lot of money to figure out a way to circumvent the ‘ironclad’ document that he signed,” he said.
But this move could come with harsh penalties attached, Karen Woody, an associate professor at the Washington and Lee University School of Law who studies securities law, told Insider earlier this year.
“The short answer is, he’ll be sued,” Woody said. “There’s a contract here, and it’s binding.”
If Musk were to back out, Twitter could sue him for the $1 billion termination fee set in the terms of the deal, though as Carnegie Mellon’s Spatt pointed out, $1 billion is less than 2.5% of the entire value of the deal, and a fraction of a percentage of Musk’s fortune.
“If he’s only on the hook for the billion, I think it’s pretty straightforward: He should walk away,” Spatt said. “He should pay the billion and protect his net worth.”
But Twitter could also sue him to force the deal through anyway. In that scenario, Twitter would ask a court to enforce what’s known as a “specific performance” clause in deal contracts that requires parties to do what they said they’d do to close the deal. Either way it would result in Musk fighting it out in court.