New Delhi: Twitter Inc has a strong legal case against Elon Musk, who walked away from his $44 billion deal to acquire the American social media company, but according to legal experts, a lengthy court battle may opt for renegotiation or settlement instead. The Delaware courts, where the two parties are set to litigate the dispute, have set a high bar for allowing acquirers to drop their deals. But target companies often choose the certainty of a renegotiated deal over a lower price or financial compensation, not a messy court battle that could last several months, said three corporate law professors interviewed by Reuters.
“The argument for doing little is that litigation is expensive,” said Adam Badawi, a law professor at UC Berkeley. “And this thing is so dirty it’s probably not worth it.” (Also Read: Housing Sales In Delhi-NCR Up 2.5 Times During Jan-June, Prices Up 7%: Report)
Spokesmen for Twitter and Musk did not immediately respond to requests for comment. (Also read: IT stocks may remain under pressure: Check analysts’ predictions)
Musk’s main claim against Twitter is that the San Francisco-based company violated their deal because it would not share enough information to support its claim that spam or fake accounts accounted for less than 5% of its active users. Twitter sticks to this estimate, but has also said that it is possible that the number of these accounts is higher.
Musk also said in a letter to Twitter on Friday that the company’s misrepresentation of the number of spam accounts could have a “material adverse effect (MAE)” that would allow them to operate under the terms of the deal’s contract. Will give
But legal experts said Delaware courts view MAEs as dramatic, unforeseen events that cause long-term damage to the company’s performance. The deal contracts between Musk and Twitter are so prescriptive that a judge has ruled that an MAE has legitimately been triggered only once in the history of such litigation – for the US of the German healthcare group Fresenius Kabi AG. In 2018 in case of termination of its deal, generic drug maker Acorn Inc.
In that case, a court ruled that Acorns’ assurances to Fresenius that he was in compliance with his regulatory obligations were wrong. It was also found that Acorns had concealed facts about his poor performance that had surfaced in the whistleblower allegations.
Legal experts were dismissing the idea that false spam account numbers would equate to a MAE on the same level as Twitter, which got Acorns in trouble.
“If this goes to court, Musk has the burden of proving that the spam account numbers were not only false, but they were so false that it would have a significant impact on Twitter’s earnings.” Lipton, associate dean of faculty research at Tulane Law School.
Musk also claimed that Twitter violated their agreement by firing two key high-ranking employees, its revenue product lead and general manager of consumer, without their consent as per their contract.
“This is probably the only claim that has a buyout,” said Boston College Law School professor Brian Quinn, but added that he didn’t think the firing was serious enough to affect Twitter’s business.
In 2020, a Delaware court allowed South Korea’s Mirae Asset Capital Co. to walk away from a $5.8 billion luxury hotel deal as the pandemic prompted seller, China’s Anbang Insurance Group, to change its normal course of hotel operations.
settle rather than litigate to the end
Most of the time, courts find favor with the target companies and order the acquirers to complete their deals – a legal remedy known as “distinctive performance”.
In 2001, for example, Tyson Foods, the largest US chicken processor, decided it no longer wanted to buy the largest meatpacker, IBP Inc. A judge ordered that the deal be completed.
However, many companies choose to settle with their acquaintances to eliminate the uncertainty about their futures that can weigh on their employees, customers and suppliers.
This happened more frequently as the COVID-19 pandemic broke out in 2020 and caused a global economic shock. In one instance, French retailer LVMH threatened to walk away from a deal with Tiffany & Co. The American jewelry retailer agreed to reduce the acquisition price from $425 million to $15.8 billion.
Simon Property Group Inc., the largest US mall operator, managed to cut its purchase price of a controlling stake in rival Taubman Centers Inc. by 18% to $2.65 billion.
Other companies let acquirers go away in exchange for financial compensation. This includes medical technology firm Chanel MedSystems Inc., which sued Boston Scientific Corp to try to walk away from a $275 million deal. In 2019, a judge ruled that the deal must be completed and Boston Scientific granted an undisclosed settlement to Chanel MedSystems.