Musk and Twitter lawyer fight in Delaware court

NOTNow that Elon Musk has decided he doesn’t want to buy Twitter Inc. after all, he can’t just walk away from the $44 billion deal. The billionaire co-founder of Tesla Inc. will have to argue in front of a Delaware judge that Twitter failed to honor its part of a merger deal reached in April. If history is any guide, his job will not be easy.

Twitter Chairman Bret Taylor promised on Friday that the social media platform would fight in the Delaware Court of Chancery to compel Musk to honor his agreement, and the company has embarked on a lawsuit. A filing could come as soon as early this week, people familiar with the matter told Bloomberg.

If the judge rules against Musk, he could be forced to pay $54.20 per share to Twitter shareholders, as he said in the deal announced April 25. A decision in his favor would let Musk walk, although he would likely have to pay a severance fee, originally set at $1 billion. There’s also the possibility that the two parties will come to an agreement that Musk still proceeds with the acquisition, potentially at a lower price.

In this case, the judge will focus on the densely worded intricacies of the 73-page purchase agreement, and the court has rarely sided with parties who, like Musk, are trying to bail out acquisition commitments.

Read more: Why Elon Musk’s plans to ‘fix’ Twitter will be harder to pull off than he thinks

Musk’s rationale centers on automated user accounts called bots and how Twitter accounts for them. He alleges the social media platform is teeming with spam bots, disputing Twitter’s claim that they make up less than 5% of total users. Musk said in his Friday filing with the U.S. Securities and Exchange Commission that Twitter’s failure to properly provide details about the number of bots amounts to what is called a “significant adverse effect on the market.” ‘company”. [MAE]“A judge must decide if such an event occurred and if it warrants Musk’s cancellation.

Larry Hamermesh, a University of Pennsylvania law professor specializing in Delaware corporate litigation, describes an EAW as an “unexpected, fundamental, and permanent” negative development — akin to a hole in the deal that cannot be repaired.

So far, Delaware courts have found only one case in which a clear EAW has emerged – Fresenius SE’s 2018 $4.3 billion takeover bid for rival drugmaker Akorn. Inc. A judge has blessed Fresenius’ decision to pull out of the deal after finding Akorn executives hid an array of issues calling into question the validity of data supporting certain drug approvals and the profitability of its operations.

Deal clouded by dispute over bot accounts

The agreement also grants Twitter officials so-called specific enforcement rights, meaning that if the judge finds that Musk’s complaints about bot data do not rise to the level of an EAW, the platform can demand that the judge force Musk to consummate the buyout.

Musk’s decision to sign the deal without doing due diligence could work against him, said Robert Profusek, head of the mergers and acquisitions department at law firm Jones Day. “His lawyers’ argument that you don’t do due diligence and test things later just isn’t the way things work in big M&As and, if accepted, would put shareholders at risk,” he said in an interview.

Judges of the Delaware Chancery Courts are known for their expertise in interpreting what can and does seem to the layperson like a maze of legalese that seeks to delineate the rights and responsibilities of both parties in a merger agreement. and acquisition.

In the Twitter agreement, platform executives are required to promptly provide Musk with “all information regarding the business, properties and personnel of the company and its subsidiaries that may reasonably be requested.” Musk argues that management failed to meet these obligations with respect to spam and bot account details.

Read more: Tesla and Elon Musk’s Tweet Violated Labor Laws Protecting Unions, Judges’ Rules

Twitter said it transmitted a lot of data about its user base. Executives told media Thursday that the company manually reviews thousands of accounts each quarter to determine the 5% spam bot tally, and believes the actual number is well below the threshold disclosed in filings. The Company uses internal data, such as examining phone numbers or Internet Protocol addresses, the unique set of characters associated with a computer or other device, to help determine whether an Account is managed by a human.

The agreement also defines a “material adverse effect on society” as “any change, event, effect or circumstance which, individually or in the aggregate, has caused or can reasonably be expected to cause a material adverse effect on the business, finances, condition or results of operations of the company and its subsidiaries”.

Marcio Jose Sanchez/AP Photo

A likely outcome is that the parties reach an amicable settlement. Musk’s efforts to end the deal are likely nothing more than a bargaining ploy, said Charles Elson, a retired University of Delaware professor and former director of the Weinberg Center for Corporate Governance at the University. ‘school.

“It’s not a material adverse change,” Elson said. “It’s just a negotiating position. He knows that Delaware courts are extremely reluctant to find anything like that in these agreements.

To make its case, Twitter has hired merger law heavyweight Wachtell, Lipton, Rosen & Katz. By hiring Wachtell, he gained access to attorneys, including Bill Savitt and Leo Strine, who served as Chancellors of the Delaware Chancery Court. The social media company is aiming to file charges early this week, said people who declined to be identified as the matter is private.

Musk brought in Quinn Emanuel Urquhart & Sullivan. The company successfully defended a defamation suit in 2019 and is representing him in an ongoing shareholder lawsuit over his failed attempt to take Tesla private in 2018.

Twitter staff morale plummets

Regardless of the outcome of the legal wrangling, the mood of many San Francisco-based Twitter employees is austere, people at or close to the company told Bloomberg. Amid the uncertainty surrounding a potential sale, several employees have lamented what they see as a lack of leadership and vision from the top, including chief executive Parag Agrawal, the people said, who demanded anonymity to discuss internal matters.

For many Twitter staff, none of the likely outcomes are acceptable. If Twitter prevails in court, the company will be run by an unpredictable and reluctant owner as it struggles to achieve ambitious growth goals. And if Musk succeeds in ending the deal, Twitter’s stock will likely plummet, and a staff already disheartened by public criticism of Musk for months on the site will suffer another emotional blow.

Several people have left or are considering leaving because they simply don’t want to work for Musk, the people said. For some, the decision to leave was cemented after a question-and-answer session in June in which Musk, who showed up late, told employees that only those who were “exceptional” would be allowed to continue. work from home.

—With help from Katie Roof

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