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Published: 14:13, July 09, 2022 | Updated: 14:13, July 09, 2022
Twitter vows legal fight after Musk pulls out of $44b deal
By Reuters
Published:14:13, July 09, 2022 Updated:14:13, July 09, 2022 By Reuters

In this file photo taken on April 14, 2022 this handout image released by TED Conferences shows Tesla chief Elon Musk speaking during an interview with head of TED Chris Anderson (out of frame) at the TED2022. (RYAN LASH / TED CONFERENCES, LLC / AFP)

Elon Musk, the chief executive officer of Tesla and the world's richest person, said on Friday he was terminating his $44 billion deal to buy Twitter because the social media company had breached multiple provisions of the merger agreement.

Twitter's chairman, Bret Taylor, said on the micro-blogging platform that the board planned to pursue legal action to enforce the merger agreement. 

"The Twitter Board is committed to closing the transaction on the price and terms agreed upon with Mr. Musk...," he wrote.

I'd say Twitter is well-positioned legally to argue that it provided him with all the necessary information and this is a pretext to looking for any excuse to get out of the deal.

Ann Lipton, associate dean for faculty research at Tulane Law School

In a filing, Musk's lawyers said Twitter had failed or refused to respond to multiple requests for information on fake or spam accounts on the platform, which is fundamental to the company's business performance.

READ MORE: Musk targets Twitter board as company adopts 'poison pill'

"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," the filing said.

Musk also said he was walking away because Twitter fired high-ranking executives and one-third of the talent acquisition team, breaching Twitter's obligation to "preserve substantially intact the material components of its current business organization."

Legal battle

Musk's decision is likely to result in a protracted legal tussle between the billionaire and the 16-year-old San Francisco-based company.

Disputed mergers and acquisitions that land in Delaware courts more often than not end up with the companies re-negotiating deals or the acquirer paying the target a settlement to walk away, rather than a judge ordering that a transaction be completed. That is because target companies are often keen to resolve the uncertainty around their future and move on.

Twitter, however, is hoping that court proceedings will start in a few weeks and be resolved in a few months, according to a person familiar with the matter.

This illustration photo taken May 13, 2022, displays Elon Musk’s Twitter account with a Twitter logo in the background in Los Angeles. (CHRIS DELMAS / AFP)

There is plenty of precedent for a deal renegotiation. Several companies repriced agreed acquisitions when the COVID-19 pandemic broke out in 2020 and delivered a global economic shock.

Twitter is hoping that court proceedings will start in a few weeks and be resolved in a few months, according to a person familiar with the matter

In one instance, French retailer LVMH threatened to walk away from a deal with Tiffany & Co. The US jewelry retailer agreed to lower the acquisition price by $425 million to $15.8 billion.

"I'd say Twitter is well-positioned legally to argue that it provided him with all the necessary information and this is a pretext to looking for any excuse to get out of the deal," said Ann Lipton, associate dean for faculty research at Tulane Law School.

Shares of Twitter were down 6 percent at $34.58 in extended trading. That is 36 percent below the $54.20 per share Musk agreed to buy Twitter for in April.

ALSO READ: Twitter's top shareholder Elon Musk decides not to join board

Twitter's shares surged after Musk took a stake in the company in early April, shielding it from a deep stock market sell-off that slammed other social media platforms.

But after he agreed on April 25 to buy Twitter, the stock within a matter of days began to fall as investors speculated Musk might walk away from the deal. With its tumble after the bell on Friday, Twitter was trading at its lowest since March.

The announcement is another twist in a will-he-won't-he saga after Musk clinched the deal to purchase Twitter in April but then put the buyout on hold until the social media company proved that spam bots account for less than 5 percent of its total users.

The contract calls for Musk to pay Twitter a $1 billion break-up if he cannot complete the deal for reasons such as the acquisition financing falling through or regulators blocking the deal. The break-up fee would not be applicable, however, if Musk terminates the deal on his own.

Digital ad woes

Musk's abandonment of the deal and Twitter's promise to vigorously fight to complete it casts a pall of uncertainty over the company's future and its stock price during a time when worries about rising interest rates and a potential recession have hammered Wall Street.

Shares of online advertising rivals Alphabet, Meta Platforms, Snap and Pinterest have seen their stocks tumble 45 percent on average in 2022, while Twitter's stock has declined just 15 percent in that time, buoyed in recent months by the Musk deal.

Daniel Ives, an analyst at Wedbush, said Musk's filing was bad news for Twitter.

"This is a disaster scenario for Twitter and its Board as now the company will battle Musk in an elongated court battle to recoup the deal and/or the breakup fee of $1 billion at a minimum," he wrote in a note to clients.


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