Twitter Has A Far Stronger Case As It Heads Into Trial Against Elon Musk

As the ongoing saga between Elon Musk and Twitter enters its fifth month, the battle lines have been drawn. While Musk has largely been on the offensive in the public arena, rattling off Tweets besmirching the company he courted in the spring, Twitter has the upper hand in the key legal questions that will determine the victor in their coming trial in October.

“This is pretty straightforward and simple,” said Adam Badawi, a professor at UC Berkeley Law School. “Twitter has the stronger case.”

When Musk began to make overtures towards the social media giant back in March, Twitter viewed Musk as an unwanted suitor while his supporters lionized Tesla’sTSLA
CEO as a hero who could rescue the social media company from financial ruin and, on a more existential level, save free speech from malevolent censors.

To coax Twitter to agree to a sale, Musk offered to buy the company at $54.20 a share, valuing the company at $44 billion, about $14 billion more than what its currently worth, along with a host of seller-friendly terms that would guarantee the transaction would close. But days after announcing the acquisition on April 25, Musk began to reproach Twitter over what he alleged were an excessive number of bots and spam accounts on its platform. Whether these concerns were genuine, an excuse to tear apart their merger agreement, or a contrivance to lower the asking price after Twitter’s stock price fell dramatically in the proceeding weeks, Musk’s complaints grew louder leading up to his abandonment of the deal on July 8.

“In some ways,” explained Stephen Bainbridge, a professor at UCLA Law School, “it’s a case of buyer’s remorse.”

Regardless of Musk’s motives, Twitter refused to let him back out of the deal. “Having mounted a public spectacle to put Twitter in play,” the company wrote in its filings with the Delaware Chancery Court, “Musk apparently believes that he… is free to change his mind, trash the company, disrupt its operations, destroy shareholder value, and walk away.” This “exit strategy,” Twitter continued, “is a model of hypocrisy” and “bad faith.”

In its lawsuit, it demanded that Musk go through with the unwanted nuptial at the agreed upon price, which is about $15 a share higher than the company’s current trading price.

Despite the public posturing on both sides, the case will ultimately rest on three legal concepts—all favoring Twitter—should it go to trial before Chancellor Kathaleen St. J. McCormick of the Delaware Chancery Court, long considered the preeminent court overseeing major corporate cases in America.

Has there been a Material Adverse Effect?

Musk has argued that Twitter’s alleged failure to provide ample information about its bots and its purported underrepresentation of the number of bots on its system constitute a material adverse effect, a condition that would allow him to annul the purchase.

“Delaware courts have been very strict” in applying this legal concept, said UCLA’s Bainbridge, so much so that the Delaware Chancery Court has found the conditions establishing a material adverse effect only once in its history.

Even the unprecedented and unforeseen economic damage caused by Covid-19 did not reach the threshold required to allow a buyer to freely walk away from its contractual obligations in a 2021 case involving the private equity giant Kohlberg. Considering that Chancellor McCormick, the same judge presiding over the Musk-Twitter lawsuit, oversaw the Kohlberg case, she is likely to apply the same logic in this case.

The high bar to prove a material adverse effect arises from the allocation of risk Delaware law allocates to parties in mergers and acquisitions. “The buyer generally bears systematic risk” such as a change in interest rates or stock market declines, explained Jeffrey Gordon, a professor at Columbia Law School. “The seller,” he added, “bears idiosyncratic risk” that is unique to the buyer rather than an negative event impacting an entire industry.

Though Twitter’s stock has fallen by 23% since April 25, more than double the drop endured by Meta, its main rival, as well as the broader NASDAQ index, its plunge isn’t unique during a downturn that has seen many tech heavyweights tumble.

Other factors emphasized by the Delaware courts also favor Twitter. The Delaware Chancery Court is considered the go-to forum for major corporate disputes in part because of its philosophy to promote certainty in merger and acquisition agreements, explained Gordon, even under shifting economic or financial conditions. “The Delaware Chancery Court has a vested interest in ensuring deal certainty,” added Badawi of UC Berkeley, because doing so enhances its standing among corporations seeking reliable and predictable courts to resolve their disputes.

In the Kohlberg ruling issued last year, for instance, Chancellor McCormick considered her decision, which forced Kohlberg to go ahead with the purchase of a company it had agreed to buy prior to the onset of the pandemic, a “victory for deal certainty.”

Will the judge grant Specific Performance if Twitter prevails?

In its legal filings, Twitter has asked the court to grant specific performance. If the court does so, it would force Musk to purchase Twitter rather than pay monetary damages—the typical remedy granted in cases involving a breach of a contract.

Generally, outcomes not involving payouts—known as equitable remedies—prohibit litigants from taking action: discontinuing the infringement of a patent or blocking the demolition of a building are typical equitable remedies handed down by judges.

This case is different in that specific performance, which is also an equitable remedy, would force Musk to purchase a multi-billion dollar company with 7,500 employees rather than block him from taking specific actions. Despite these unusual circumstances, “the Delaware courts won’t have qualms about enforcing this,” said Bainbridge. The fact that the purchase agreement allows for specific performance strengthens Twitter’s position, added Albert Choi, a professor at the University of Michigan Law School. “The chance that the Delaware court will grant specific performance… is pretty substantial,” he continued.

Will the bots matter?

The primary hope for Musk is that Twitter’s disclosures about the number of bots and fake accounts on its network will scuttle the deal. “One big inflection point” in the coming months, explained Badawi, “will be discovery on the bots issue.”

Musk has argued in court that Twitter has been unresponsive to his requests for more information about its bots and that it “is dramatically understating the proportion of spam and false accounts” in its SEC filings.

Twitter has countered that its disclosures—both with the SEC and in private with Musk’s representatives—do not violate the purchase agreement.

“Musk is going to ask for the sun, the moon, and the stars” during discovery, said Badawi, in order to unearth some nugget of evidence to support his position.

Because the issue of bots should have been investigated prior to the execution of the agreement, “a sophisticated judge isn’t going to be persuaded” by Musk’s strategy, explained Gordon. The judge will be able to determine whether Musk is making a bona fide request or is using it as pretense to coax better settlement terms from Twitter. Bainbridge agreed: “Twitter has a very strong argument that the representations were not breached,” he said.

On all three key issues, “Twitter has a very strong case,” Bainbridge said. Perhaps that will compel him to settle rather than risk going to trial. Then again, Musk is renowned for defying conventional wisdom. On July 11, he Tweeted four photos of himself laughing at the prospect of going to court.