Legal experts say Twitter (TWTR.N) has a strong case against Elon Musk for pulling out of its $44 billion deal to buy the US social media company. However, instead of a lengthy lawsuit, Twitter could choose to renegotiate or settle with Musk rather than go to court.
The case between the two parties will be heard in Delaware courts, making it difficult for buyers to pull out of deals. But three business law professors interviewed by Reuters said target companies often prefer the certainty of a renegotiated deal at a lower price or financial compensation over a messy lawsuit that could last many months.
Adam Badawi, a law professor at UC Berkeley, said, “The reason for settling for less is that going to court is expensive.” “This is so complicated it might not be worth it,” she said.
When asked for a comment, Twitter and Musk did not immediately respond.
Musk’s main claim against Twitter is that the San Francisco-based company broke his contract by not giving him enough information to substantiate its claim that less than 5 percent of its active users are spam or fake accounts. Twitter has said they are sticking to this estimate, but the number of accounts may be higher.
Musk also said in a letter to Twitter on Friday that the company’s lie about the number of spam accounts could be a “material adverse effect (MAE)” that could allow him to pull out of the deal.
But legal experts said courts in Delaware view MAEs as big, unexpected things that hurt a company’s long-term performance. Deal contracts like the one between Musk and Twitter are so specific that a judge has ruled that a MAE has only been legally activated once in the history of such cases when German health care group Fresenius Kabi AG ended its deal to buy US generic drug maker Akorn in 2018 .
In that case, a court said Akorn was lying when it told Fresenius that it met all of its legal requirements. It also found that Akorn had kept facts about how his performance got worse from whistleblowers.
Legal experts didn’t think that having wrong numbers for spam accounts would be a MAE for Twitter on the same level as the problems Akorn faced.
Ann Lipton, associate dean for faculty research at Tulane Law School, said: “If it goes to trial, Musk will more than likely have to prove that the spam account numbers were not only false, but so false that it will have a major effect. on Twitter’s earnings going forward.”
Musk also said Twitter broke their contract by firing two key high-level employees, the revenue product leader and consumer general manager, without his consent, which was required under their contract.
Brian Quinn, a professor at Boston College Law School, said: “That’s probably the only claim that has any weight,” but added that he didn’t think the layoffs were big enough to hurt Twitter’s business.
In 2020, a Delaware court ordered South Korea’s Mirae Asset Capital Co. pulling out of a $5.8 billion luxury hotel deal as the pandemic forced its seller, China’s Anbang Insurance Group, to change the way it used to run its hotels.
Settle instead of litigate to the end
Usually, the courts decide in favor of the target company and order the acquirer to close the deal. This is referred to as “specific performance” and is a remedy.
In 2001, Tyson Foods, the largest chicken processor in the United States, decided it no longer wanted to buy IBP Inc., the largest meat packer. A judge said the deal should go through.
But many companies choose to settle with their acquirers so that their employees, customers, and suppliers don’t have to worry about what will happen to them in the future.
When the COVID-19 pandemic broke out in 2020 and shook the global economy, this happened more often. In one case, French retailer LVMH (LVMH.PA) threatened to stop doing business with Tiffany & Co. The US jewelry store agreed to cut the price of the deal by $425 million, bringing it to $15.8 billion.
Simon Property Group Inc. (SPG.N), which controls most shopping centers in the US, was able to acquire a majority stake in a competitor, Taubman Centers Inc., for 18% less, or $2.65 billion.
Other companies paid the people who wanted to buy the money to let them go. This includes Channel Medsystems Inc, a medical technology company. It sued Boston Scientific Corp (BSX.N) for trying to pull out of a $275 million deal. In 2019, a judge said the deal should go through, and Boston Scientific paid Channel Medsystems an undisclosed settlement.