Elon Musk has decided he wants to break off his agreement to buy Twitter.
According to legal experts, he might have good reason to back out of the $44 billion agreement without having to pay a hefty penalty.
Twitter’s board chair responded to Musk’s letter by announcing that the company would file a lawsuit.
Twitter Continues Force On Musk Complete The Deal
Twitter sued Elon Musk on Tuesday for pulling out of the $44 billion deal to buy the social media platform.
The lawsuit, which was filed in the Delaware Court of Chancery, sets the stage for a drawn-out legal battle.
Twitter will seek to have Musk follow through on the acquisition or require him to pay the $1 billion break-up fee outlined in the original agreement.
“Having mounted a public spectacle to put Twitter in play and having proposed and then signed a seller-friendly merger agreement, 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,” the lawsuit says.
Twitter’s legal action comes after Musk agreed to buy the company in April.
The deal’s status has been up in the air for weeks, as the Tesla CEO’s public comments about spam accounts and fake accounts have raised questions about his next moves.
The Court Could Order The World’s Richest Person To Pay Damages Instead
Since Musk suddenly has cold feet, he could be forced to pay damages.
But even though there is precedent to force a buyer to complete a deal, the court may be reluctant to do so, said Donna Hitscherich, a professor at Columbia Business School.
She said the court would typically put the parties in their position before the unfortunate events occurred.
Musk may not be ordered to buy Twitter in that case, but they could stick him with billions of dollars in damages.
That amount will likely be less than the $44 billion Musk agreed to pay, but it avoids the awkward situation of forcing Musk to buy a company he no longer wants to own.
Musk Believes Twitter Broke Their Agreement
“Mr. Musk is terminating the Merger Agreement because Twitter is in material breach of multiple provisions of that Agreement, appears to have made false and misleading representations upon which Mr. Musk relied when entering into the Merger Agreement, and is likely to suffer a Company Material Adverse Effect,” Musk’s lawyers wrote in a letter to Twitter’s Chief Legal Officer Vijaya Gadde.
Musk points to his unfounded claims that Twitter is misleading its investors and users about the size of its fake account population, which the company estimates to be less than 5% of total accounts.
But Musk had no apparent qualms with Twitter’s bot count before signing the sale agreement.
He actually mentioned he planned to take on the platform’s spam problem as the company’s new owner.
It’s assumed that Musk wants out because the stock market took a dive shortly after the terms of the deal were agreed upon.
That dive also took a solid chunk of his Tesla billions over the cliff, his primary source of wealth.
Musk And Investors May Be Looking For A Better Deal
Musk might just want Twitter to lower its sale price.
Twitter shares recently fell 8% and are down about 23% from Musk’s agreed-upon purchase price of $54.20 per share.
The decline is connected to a general decline in IT stock prices this month.
Since the market closed on April 25, when Twitter accepted Musk’s offer, the Nasdaq has decreased by another 11%.
This refusal to buy is probably a negotiation tactic on behalf of Elon.
The market has dropped a lot.
He’s likely using the guise of actual active users as a negotiation ploy.
Musk might feel pressure from other potential investors in Twitter to lower the price, even if the world’s wealthiest person isn’t as concerned.
He is in talks with outside investors for equity and preferred financing to lessen his stake in Twitter.
If he can get the social media company at a lower price, the returns could be greater for outside investors if Twitter returns to public ownership.
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References:
https://www.politico.com/news/2022/07/12/twitter-sues-elon-musk-44b-deal-buy-company-00045476
https://www.npr.org/2022/07/11/1110916343/twitter-to-sue-elon-musk
https://www.cnbc.com/2022/05/13/elon-musk-cant-just-walk-away-from-twitter-deal-by-paying-1-billion.html
https://www.npr.org/2022/07/08/1110539504/twitter-elon-musk-deal-jeopardy
