Elon Musk is in a very specific situation at the moment. He agreed to buy Twitter at a price of $54.2 per share. But now, he seems to be reconsidering and finally backing up from the deal. However, that might not go according to plan. As a result, he faces a lawsuit forcing him to proceed and close the deal.
This will not be the first time that a similar situation is put on the plate for the court to solve. Back in 2001, the court ordered the chicken processor Tyson foods to complete a deal of $3.2 billion to acquire the meatpacker IBP Inc. In 2021 the court ordered Kohlberg & Co LLC to proceed and close the deal to purchase DecoPac Holdng Inc, for $550 million.
However, there is a specific situation with Musk and the Twitter deal. Previously all these court cases were between two companies trying to acquire one another. However, now, the situation is such that an individual is seeking to acquire a company. And this is a first. That is why the public is not certain of the decision that the court will deliver. Another point is the price. It is the first time that such an issue appears when the deal in question is with such a high number.
Will The Court Order Elon Musk To Proceed And Buy Twitter? – What Options Does Musk Have?
“He’ll receive treatment like a deadbeat dad not paying child support.” – Minor Myers says, a professor at UConn School of Law. “It would not be that hard.”
Delaware courts make it really difficult for someone to walk away from such deals. But, on the other side, that may not be Musk’s goal at the moment. It happens often that companies choose to re-negotiate the price and go with the deal at a lower price when put in such situations. All this for the sake of time and to avoid a messy court battle that lasts for months, sometimes even years.
“The argument for settling at something lower is that litigation is expensive.” – Adam Badawi, a law professor at UC Berkeley agrees with this thesis. “And this thing is so messy that it might not be worth it.”
The Twitter deal and the situation in which Elon is at the moment is a total mess. From one side, Elon claims that Twitter breached the deal because they didn’t share enough information backing up their claims that they have less than 5% spam and fake accounts. Twitter partially confessed on this one saying that ‘it’s possible the number of these accounts to be higher’.
As soon as Elon heard this it was just like a complete relief for him. He immediately sent a letter to Twitter stating that he requests to walk away under the terms of the deal because they mispresented the number of spam accounts. According to Musk, the number of spam accounts is a material adverse effect or MAE.
However, legal experts are not on his side with this. They see this ‘MAE’ to be dramatic. Because MAEs are unexpected events that cause long-term harm to a company’s performance. And the performance of Twitter according to them is not so greatly affected by spam and fake accounts.
“Musk has the burden to prove more likely than not, that the spam account numbers not only were false, but they were so false that it will have a significant effect on Twitter’s earnings going forward.” – Ann Lipton, an associate dean for faculty research at Tulane Law School says.
Musk says that the deal is breached once more when the board fired two major figures in the company without consulting him. The revenue product lead and the general manager of consumers were fired without any information processed to Musk. As a person buying the company, and as a person that currently has about 10% of Twitter’s shares he is qualified to receive such information beforehand.
According to business experts, this is a claim that is acceptable. The letting go of such major figures is most certainly affecting the business. In fact, this might be even more serious than the spam and fake accounts issue.
For such an issue, in 2020 the same court allowed Mirae Asset Capital Co to walk away from a $6 billion deal to acquire the Anbang Hotel just because they altered the hotel’s ordinary course of operations due to the pandemic.
So really, what options does Twitter have? First, and more probable solution to the case is that they sit down with Musk and re-negotiate the price. This will be beneficial to all. And they are aware that the price of $54 per share is not realistic. The price for Twitter shares has been fluctuating around $40 since 2018. Yes, there was one point in 2021 when it topped $70, but that was just for a brief period. Just a month after that it was back to ‘normal’.
Furthermore, the stock market price at the moment is oscillating around $36. That is more than 30% lower than the agreed price. So, if they are willing to sit down and re-form the price, the situation will reach a solution fast.
Another option that Elon might have at the moment is to pay a settlement price and walk away without proceeding. In the original deal, it is stated that he ought to pay $1 billion if he walks away. So maybe he should do that. The stock market price for Twitter is down by 30%. That brings the total price for the company to around $30 billion. We can conclude that with proceeding, Musk might initially lose more than $14 billion. And by paying the settlement price he is losing only $1 billion.
Do you think that he even wants to proceed? Regardless of the price, do you think he still wants the company?\
