WILMINGTON, Del (Reuters) – Twitter Inc has filed a strong legal case against Elon Musk for abandoning a deal to buy the U.S. social media company for $44 billion, but may opt for renegotiation or settlement rather than a prolonged court battle, according to legal experts. .
The Delaware court litigating the dispute between the two sides has set a high standard for allowing acquirers to abandon deals. But three corporate law professors interviewed by Reuters said targets typically opt for the certainty of a renegotiated deal at a lower price or financial compensation rather than a messy court battle that could last for months.
“The rationale for settling at a lower price is that litigation is expensive,” said Adam Badawi, a law professor at the University of California, Berkeley. “And it’s something that’s so messy, it may not be worth it.”
Spokespeople for Twitter and Musk did not immediately respond to requests for comment.
Musk’s main allegation against Twitter is that the San Francisco-based company violated their deal because it wouldn’t share enough information with him to support its claim that spam or fake accounts account for less than 5 percent of its active users, an estimate that Twitter stands by but also says the number of those accounts could be higher.
In a letter to Twitter on Friday, Musk also said the company’s misrepresentation about the number of spam accounts could be a “material adverse effect (MAE)” that would allow him to walk away under the terms of the deal.
But legal experts say the Delaware court viewed the MAE as a dramatic, unexpected event that caused long-term damage to the company’s performance. Trading contracts such as the one between Musk and Twitter are so regulated that the judge ruled that MAE has only been effectively triggered once in the history of such litigation – when German healthcare conglomerate Fresenius Kabi AG terminated its deal with U.S. generic drugmaker’s Akorn Inc in 2018.
In that case, the court ruled that Akorn’s assurances to Fresenius that it was complying with its regulatory obligations were inaccurate. It also found that Akorn had concealed the deteriorating performance that emerged from the whistleblower’s allegations.
Legal experts are dismissive of the idea that inaccurate spam accounts are the equivalent of Twitter’s MAE with the same problems that plagued Akorn.
Ann Lipton said, “If it goes to court, the burden is on Musk to prove that the spam accounts are not only false, but that they are so false that it will have a significant impact on Twitter’s future earnings.” Tulane Law School teaches Associate Dean for Research.
Musk also claims that Twitter violated their agreement by firing two key senior employees, the head of revenue products and the general manager of consumers, without his consent.
That’s probably the only claim worth buying,” said Brian Quinn, a professor at Boston College Law School, but added that he didn’t think the firings were serious enough to affect Twitter’s business.
In 2020, a Delaware court allowed South Korea’s Mirae Asset Capital Co to abandon a $5.8 billion luxury hotel deal after a pandemic caused the seller, China Anbang Insurance Group, to change its general course hotel operations.
Settlement rather than litigation to the end
In most cases, courts rule in favor of the target company and order the acquirer to complete the deal – a legal remedy known as “specific performance.
For example, in 2001, Tyson Foods, the largest U.S. chicken processor, decided not to acquire IBP Inc, the largest meat processor, and a judge ordered the deal to be completed.
However, many companies have chosen to settle with acquirers to end the uncertainty about the future that can stress employees, customers and suppliers.
This happens more frequently when the COVID-19 pandemic breaks out in 2020 and causes a global economic shock. In one example, French retailer LVMH threatened to abandon its deal with Tiffany & Co. The U.S. jewelry retailer agreed to reduce its purchase price by $425 million to $15.8 billion.
Simon Property Group Inc, the largest U.S. shopping center operator, managed to reduce its purchase price for a controlling stake in rival Taubman Centers Inc by 18 percent to $2.65 billion.
Other companies let their acquirers go in exchange for financial compensation. These included medical technology company Channel Medsystems Inc, which sued Boston Scientific Inc for trying to walk away from its $275 million deal. in 2019, a judge ruled that the deal should be completed and Boston Scientific paid an undisclosed settlement to Channel Medsystems.