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Twitter takes Elon Musk to court for backing out of acquisition deal

A legal battle over Elon Musk’s obligation to buy Twitter could come to trial sooner rather than later at the Delaware Court of Chancery.

(CN) — Twitter sued to force Elon Musk to follow through on a $44 billion deal to buy the company, accusing the billionaire Tesla founder of reneging on a binding agreement even as Musk accuses the social media platform of withholding critical information about fake accounts.

“In April 2022, Elon Musk entered into a binding merger agreement with Twitter, promising to use his best efforts to get the deal done. Now, less than three months later, Musk refuses to honor his obligations to Twitter and its stockholders because the deal he signed no longer serves his personal interests,” Twitter says in the lawsuit it filed Tuesday in the Delaware Court of Chancery, a specialized court for litigating corporate disputes. “Having mounted a public spectacle to put Twitter in play, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he — unlike every other party subject to Delaware contract law — is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away.”

Musk agreed to buy Twitter in April for $54.20 per share, a deal which would take the now-publicly traded company private.

Through its lawsuit, Twitter seeks to compel Musk to close the deal.

Brian J.M. Quinn, a professor at Boston College Law School who specializes in corporate law and mergers, said Musk’s complaint is couched in the language of buyer’s remorse.

“This is a very familiar argument to the courts in Delaware; a buyer agrees to buy and decides he or she has overpaid and wants out. Courts are not amenable to buyers who take this position,” he said.

Musk had been threatening to walk away since June, when he accused the company of materially breaching its obligations under the agreement by refusing to provide him with information about fake accounts.

“If Twitter is confident in its publicized spam estimates, Mr. Musk does not understand the company’s reluctance to allow Mr. Musk to independently evaluate those estimates,” his Skadden Arps attorneys said in a letter filed with the U.S. Securities and Exchange Commission on June 6.

Twitter’s lawsuit characterizes Musk’s “exit strategy” as both a model of hypocrisy and bad faith, condemning him for demanding the platform turn over information about the number of “spam bots” only after the price of Tesla stock nosedived.

Twitter says Musk was well aware of the bot problem, telling board president Bret Taylor in a text message that a purge of fake users should be done after the company is taken private.

Twitter also charges Musk with insulting the company publicly in violation of a nondisparagement agreement, presenting an array of the tweets where he accuses the company of inaccurately estimating that fewer than 5% of its accounts are fake. The complaint also includes screen grabs of tweets where Musk appears to taunt the company.

“Musk’s conduct simply confirms that he wants to escape the binding contract he freely signed, and to damage Twitter in the process,” the company says.

Quinn was partial to Twitter’s case.

“Obviously Musk has not yet responded so we see only the facts presented by Twitter, but those facts are pretty compelling,” Quinn said. “The thing that grabs the attention the most is that they use every single tweet they can to hoist him on his own petard.”

He said Musk could have had a stronger leg to stand on had he not waived due diligence.

“He’s the richest man in the world. He has enough money; he just doesn’t want to spend it right now on this,” Quinn said.

Quinn said the Delaware Court of Chancery in well-versed in these kinds of cases, where a buyer tries to back out of a deal once it appears less lucrative.


He cited Snow Phipps Group, LLC v. KCake Acquisition, where the court ordered a private equity buyer to acquire a cake decoration supplier in April 2021. The court found the buyer could not back out of the agreement because the company’s sales declined at the start of the Covid-19 pandemic.

Quinn said cases like this usually move faster than in federal court, and that it is in Twitter’s best interest to get the dispute resolved quickly.

Twitter has already filed a motion to expedite and requested a four-day trial in September since the agreement sets a “drop-dead date” of Oct. 24 for completion of the merger.

“These kinds of cases in the past have been done really quickly,” Quinn said. “Every day they wait is a day the company is harmed.”

Though it is a high burden, the court has allowed the termination of agreements when companies are not straightforward with their acquirers — resulting in what’s called a “material adverse effect,” in corporate parlance.

In a landmark case from 2018, healthcare company Fresnius was allowed to back out of a merger agreement with generic pharmaceuticals manufacturer Akorn after the chancery court found Akorn had not disclosed serious data integrity issues that put Akorn’s regulatory compliance at risk.

Additionally, in 2021, the court held that a Korean financial service company could terminate a $5.8 billion deal to acquire a portfolio of 15 luxury hotels after the owner failed to disclose that it shut down two of the hotels and limited operations at the others due to Covid-19, and that it had not been able to obtain title insurance.

Lawrence Cunningham, who teaches corporate law at George Washington University School of Law, said convincing a Delaware court to grant such a termination could prove difficult.

“The Delaware courts have been very picky about interpreting what counts as a material advise effect,” he said. “What happens in most of the cases is a company’s industry deteriorates or business model frays at the edges, a recession takes hold and the buyer says, ‘Gee, I’m paying more than this business is worth.’ The courts have been dismissive of that way out. Buyers take the risk when they agree to buy an asset.”

Cunningham said Musk’s legal team will have to show that the bot issue rises to the level of a material adverse effect.

“They’ll be able to make that argument with a straight face. It’s not a frivolous argument. But it’s not won in the past. It will have to get a sympathetic judge, or a judge who is willing to give the buyer the benefit of the doubt. But my reading of the Delaware judges and cases is they’re not like that. They’re all business,” Cunningham said.

One exception could be if the bot count is indeed much higher than Twitter let on.

“If the bots are 10%, then we might have a different case. I don’t know how Elon would know that and I haven’t seen any evidence to support that assertion, and Skadden Arps doesn’t say what that is,” Cunningham said. “But that’s proprietary information. I can see their circumspection and I can see him [Musk] saying, ‘I can’t do without it.’”

Cunningham said that information could end up before a judge.

“What a court would likely consider doing is ordering a limited disclosure of that information. It could simply look at it itself and require Twitter to turn it over to the court, or it could hire a special master to try to make an independent assessment.”

Attorneys from Wachtell, Lipton, Rosen & Katz in New York and Potter, Anderson & Corroon in Delaware represent Twitter. The Palo Alto-based firm Skadden Arps, Slate, Meagher & Flom represents Musk.

Follow @MariaDinzeo
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