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Elon Musk may have to pay the price for scrapping Twitter deal, view legal experts
- IBJ Bureau
- Jul 10, 2022
Twitter has a strong legal case against Elon Musk walking away from his $44-billion deal to acquire the US social media company. But he could opt for a renegotiation or settlement instead of a long court fight, note legal experts.
Delaware courts, where the dispute between the two sides is set to be litigated, have set a high bar for acquirers being allowed to abandon their deals. But target companies often choose the certainty of a renegotiated deal at a lower price or financial compensation rather than a messy court battle that can last for many months, three corporate law professors interviewed by the Reuters have said.
“The argument for settling at something lower is that litigation is expensive,” says Adam Badawi, a law professor at UC Berkeley. “And this thing is so messy that it might not be worth it.”
Twitter and Musk spokespeople did not immediately respond to requests for comment.
Mr Musk’s main claim against Twitter is that the San Francisco-based company breached their deal because it will not share with him enough information to back up its claim that spam or fake accounts constitute less than 5 per cent of its active users. Twitter has stood by this estimate but also said that it’s possible that the number of these accounts is higher.
Mr Musk also said in a letter to Twitter on Friday that the company’s misrepresentation of the number of spam accounts might be a “material adverse effect (MAE)” that would allow him to walk away under the terms of the deal contract.
But legal experts said Delaware courts view MAEs as dramatic, unexpected events that cause long-term harm to a company’s performance. Deal contracts such as the one between Mr Musk and Twitter are so prescriptive that a judge has ruled that an MAE has validly been triggered only once in the history of such litigation – in the case of German healthcare group Fresenius Kabi ending its deal for US generic drugmaker’s Akorn in 2018.
In that case, a court ruled that Akorn's assurances to Fresenius that it was in compliance with its regulatory obligations were inaccurate. It also found that Akorn had withheld facts about its deteriorating performance that emerged in whistleblower allegations.
Legal experts were dismissive of the idea that inaccurate spam account numbers would amount to an MAE for Twitter on the same level as the problems that had plagued Akorn.
“If it goes to court, Mr 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 significant effect on Twitter’s earnings going forward,” said Ann Lipton, associate dean for faculty research at Tulane Law School.
Mr Musk has also claimed that Twitter has breached their agreement by firing two key high-ranking employees, its revenue product lead and general manager of consumer, without his consent as required by their contract.
“That’s probably the only claim that has any purchase,” said Brian Quinn, a professor at Boston College Law School, but he added that he did not believe the firings were serious enough to affect Twitter’s business.
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