Musk’s Twitter Tactics Could Set ‘Bad Precedent’ for Other Deals

Elon Musk faces numerous hurdles if he follows through on his threat to walk away from his purchase of Twitter, according to legal experts. At the same time, Twitter might need to renegotiate the deal unless it is ready to fight through costly and protracted litigation.

Such a renegotiation might be a quick way for the company to resolve the dispute with Musk, but it would also set a troubling precedent for mergers and acquisitions, the experts say.

“It’s a problem with contracts at the base in terms of: [How] do we sign on the dotted line and have that mean something?” said Karen Woody, an associate professor of law with the Washington and Lee University School of Law. “It is problematic that this is the way that business would be done going forward.”

Jim Park, a professor at the UCLA School of Law, agreed. “It would be a bad precedent if someone could get out of a merger contract simply by demanding sensitive information on some aspect of a company’s business. I think that Musk is acting in bad faith,” he said.

In April, Musk agreed to acquire San Francisco-based Twitter and take it private for $44 billion. But in a letter to the company Monday, he said the company is refusing to disclose data on the number of spam and fake accounts on its social-media platform, information he says he needs to facilitate financing for the deal.

“This is a clear material breach of Twitter’s obligations under the merger agreement, and Mr. Musk reserves all rights resulting therefrom, including his right not to consummate the transaction and his right to terminate the merger agreement,” Ringler wrote.

A Twitter spokesman said the company “will continue to cooperatively share information with Mr. Musk to consummate the transaction, in accordance with the terms of the merger agreement.” He added: “We intend to close the transaction and enforce the merger agreement at the agreed price and terms.”

Woody and Park said it’s unlikely Musk will be able to wholly abandon the deal, and he could face a lawsuit from Twitter to enforce the terms of the merger agreement if he tries to walk away. Because Musk waived his right to conduct due diligence before signing the deal, Twitter could make the argument that he isn’t entitled to the data he requested, Park said.

“He does not have a reasonable basis for requesting this information, especially given that he has signaled that he may use this information to pull out of the deal,” Park said. He said a court would be more likely to side with Twitter if it believes Musk is approaching the deal in bad faith.

Shares of Twitter ticked down 1.5 percent, to $39.57, on Monday. Twitter shares have retreated in recent weeks, in step with an overall slide in tech stock prices that began after Musk signed his deal. The all-cash deal is priced at $54.20 a share.

The fact that Musk’s argument for pulling out of the deal now hinges on Twitter refusing to provide the information he requested, and not on whether Twitter’s claims about its user base are true or false, is a shift in strategy for the SpaceX and Tesla CEO, Woody said. She said neither would be compelling reasons for a court to let him walk away.

That said, it isn’t likely that a court would force Musk to go through with the deal. The merger agreement specifies that Musk would have to pay $1 billion to walk away. It’s unlikely a court would intervene unless it deemed that penalty insufficient, Woody said.

The costs of a long court battle could also put pressure on Twitter to resolve the case quickly, Park said. “The more uncertainty that Musk can insert into the process, there may be some pressure for Twitter to negotiate some sort of a settlement, where payment is made by Musk but they don’t actually go through with the deal,” he said.

Other options for Twitter would be to renegotiate the deal or simply hand over the information Musk wants, Woody said. “There’s a little bit of, frankly, bullying—forcing [Twitter] back to the table just to get a better price,” she said. But she added that option might be more appealing than litigation. “It would be a long, drawn-out process to go the other way,” she said.

From: Corporate Counsel