As Elon Musk walks out of Twitter deal, what are the legal implications

resr 5paisa Research Team 11th July 2022 - 06:34 pm
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Over the last few months, the proposed deal by Elon Musk to buy out Twitter has generated more heat than light. That is the way it is likely to remain as Elon Musk has now officially walked away from the $44 billion Twitter deal. Elon Musk has argued, and perhaps rightly so, that Twitter has more spam accounts than it claims. While Twitter claims about 5% spam accounts, Musk estimates this number to be closer to 30%, which is a huge number. Also, Musk has been unhappy with the limited information shared with him on the BOT usage.

There are several reasons that Elon Musk has proffered for walking away from an agreed $44bn takeover of Twitter. It was supposed to provide a captive social media property to Elon Musk. However, with Musk deciding to walk out of the deal, it sets the stage for a prolonged legal battle. The differences boil down to the spam BOT accounts although may call it a late realization that Musk was paying top dollars for a company that was more of a platform for verbal duels. Its revenue models have always remained hazy and undefined.

What exactly is Musk’s legal case and how strong is his case. Musk’s lawyers have argued that Twitter underrepresented the number of spam accounts on the platform and hence constitutes company material adverse effect. Musk is now veering around to the view that it may not be worth the $44 billion offered by him. The full disclosure is a material part of the contract which means Musk would be prima facie justified in walking away from the transaction on the grounds of inadequate and patchy disclosure of SPAM and BOT accounts.

However, like in most legal cases, the wordings are deliberately ambiguous. For instance, legal experts doubt whether failure to provide additional information can breach the covenant and justify walking out of the deal. After all, the agreement calls for Twitter to share reasonable information and that could be a grey area. In such case, the onus will be Musk to prove to the court that the information that he was seeking was legitimately required. Unreasonable information is not covered under this clause.

What are the options in front of Twitter? The company is likely to pursue legal action to enforce the agreement, especially considering that the stock price of Twitter also fell sharply after doubts were raised on the deal. Ideally, Twitter is likely to file for a declaratory judgment that it was not in violation of the agreement and that Musk cannot just walk away. Twitter can also seek an order from the court that Musk specifically perform his obligations under the agreement. This would push Musk to a tight corner.

There are other options also available. In lieu of pursuing the legal case, Twitter can also settle for the $1 billion break fee. That would be a huge sum for nothing but that could face a lot of pressure. Of course, that would still be a better choice for Musk than end up buying a business he really does not need. There is also the possibility that Musk is still interested in Twitter but for a lower price. Both parties can exit to close the issue amicably and that is also entirely a possibility in the Musk / Twitter case. 

There are 3 full options available in front of Musk and Twitter. They can enforce the contract, or they can agree to a reduced value or they can settle for the break up fee of $1 billion. For now, a lot will depend on their meeting Kerala this week.

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