Why Elon Musk's $44 billion deal to buy Twitter could end up in court

Elon Musk may have changed his mind about paying $44 billion for Twitter. But it's not so easy to walk away.

The billionaire CEO of Tesla and Space X struck a deal to buy the social media company back in April. But almost immediately, he started hinting – and then saying outright – that he had cold feet. In May he declared the purchase was "on hold" while he looked into Twitter's accounting of how many users are not real people, but automated bots or spam. Soon after, Twitter agreed to give him access to its "firehose" – a real-time stream of more than 500 million tweets posted every day. Since then, the two sides have been sharing information and working to close the transaction.

On Thursday, the Washington Post reported the deal is "in jeopardy" because Musk doubts that Twitter's spam figures are verifiable. His team is "expected to take potentially drastic action," the Post reported, though its sources did not elaborate what that action might be.

Bots may not be the only factor in Musk's apparent change of heart. While his offer of $54.20 a share was initially seen as a lowball price for Twitter, given that it was trading above $70 last year, tech stocks and the market as a whole have fallen sharply since he struck the deal.

Twitter shares are now trading around $37, down nearly 30% from the day Musk's purchase was announced. He's even said he might seek to negotiate a lower price.

But escalating his fight could be costly for Musk – and the battle would almost certainly wind up in a Delaware courtroom that handles corporate disputes.

Musk and his representatives did not respond to requests for comment. Twitter spokesman Brian Poliakoff declined to comment. He pointed to a statement the company issued in June saying it is "has and will continue to cooperatively share information" with Musk and that "we intend to close the transaction and enforce the merger agreement at the agreed price and terms." The company expects to hold a shareholder vote on the deal by mid-August.

So, what are Musk's and Twitter's options?

Musk signed a merger agreement

The two sides have signed a legal agreement that Musk will buy Twitter for $54.20 a share. If either side breaks off the deal, they could be on the hook to pay a $1 billion fee to the other party.

By raising concerns over bots on Twitter, Musk may be trying to lay the groundwork to get out of paying that fee. But legal experts say that would be an uphill battle.

For years, Twitter has publicly said it estimates less than 5% of daily users who see ads are spam or bots (but has also cautioned the number could be higher).

Musk disputes this, saying he believes as many as 20% of accounts may be fake. While Twitter gave Musk access to its firehose of public data, it told reporters this week its spam estimates are also based on private data, such as users' IP addresses, phone numbers, locations and behavior – and are therefore difficult for outsiders to verify.

Even if Twitter's 5% figure is incorrect, that still might not be enough to let Musk back out or change the terms of the deal without paying a hefty price.

"Merger agreements are drafted to avoid exactly what Musk is doing, which is try to find some tiny little false thing and then say, 'Whoops, I get to walk away now," said Ann Lipton, a business law professor at Tulane University Law School. "They specifically say things like, you can't back out unless it's not just false, but incredibly false, hugely false, massively damaging to the company."

Twitter could take Musk to court

If Musk went ahead and terminated the deal anyway, Twitter would likely sue him for a lot more than the $1 billion breakup fee. The merger agreement includes what's known as a "specific performance clause," which says Twitter can take Musk to court to force him to go through with the purchase as long as he still has financing in place.

While that may sound risky – and costly – for Twitter, Lipton says the company's case would be "very strong," and its board has a strong incentive to see the sale through. Shareholders are expecting to receive $54.20 a piece for their shares. The board's view, according to a person familiar with the deal talks, is that the sale agreement with Musk is the most valuable part of Twitter right now.

"They would much rather have the $54.20 without a court fight, but it's worth fighting over," Lipton said. Given the company's current share price, "$54.20 seems like an unbelievable deal for Twitter. So there is a lot that they could sacrifice that would still make it worth it in the end if they got to force Musk to close."

Musk might try to get Twitter at a discount

Still, some Wall Street analysts say Twitter's board and management should be open to accepting a lower price to avoid a lengthy legal battle.

"There's no chance it's getting done at $54.20," said Angelo Zino, analyst at CFRA Research. "You're either going to see a 15 to 20% drop in the offer price to get Elon Musk engaged again, or he continues to play the bot card."

Taking Musk to court could be even more damaging to Twitter at a time when uncertainty over the deal and what the billionaire's ownership might mean are weighing heavily on the company. Morale is already low and some employees are leaving. CEO Parag Agrawal has shaken up his executive ranks and announced a hiring freeze and spending cuts.

Going to court "doesn't bode well for the business prospects of your company, and it further adds uncertainty to the employee base," Zino said.

That's also a risk for Musk, Lipton said. "What if he has to buy the company and now he's kind of undermined it at the same time?"

Ultimately, she said, the billionaire's antics, however chaotic, appear to have a single goal: "I don't think he's committed to winning. I think he's committing to not spending $44 billion on Twitter."

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