WILMINGTON, Delaware, July 8 (Reuters) – Twitter Inc (TWTR.N) has a strong legal case against Elon Musk pulling out of its $44 billion deal to acquire the American social media company, but could opt for a renegotiation or settlement instead of a lengthy court battle, legal experts say.
Courts in Delaware, where the dispute between the two parties is expected to be litigated, have set the bar high for acquirers to be allowed to drop their deals. But target companies often choose the certainty of a renegotiated deal at a lower price or financial compensation over a messy court battle that can drag on for months, said three corporate law professors interviewed by Reuters.
“The argument for settling at something lower is that litigation is expensive,” said UC Berkeley law professor Adam Badawi. “And this thing is so messy it might not be worth it.”
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Spokespersons for Twitter and Musk did not immediately respond to requests for comment.
Musk’s main claim against Twitter is that the San Francisco-based company broke their agreement because it won’t share enough information with him to back up his claim that spam or fake accounts make up less than 5% of its users. assets. Twitter stood by that estimate, but also said it’s possible the number of such accounts could be higher.
Musk also said in a letter to Twitter on Friday that the company’s misrepresentation of the number of spam accounts could be a “material adverse effect (MAE)” that would allow him to opt out under the terms of the contract.
But legal experts said Delaware courts view EAWs as dramatic and unexpected events that harm a company’s performance in the long term. Settlement contracts such as the one between Musk and Twitter are so prescriptive that a judge has ruled that an EAW has only been validly triggered once in the history of such litigation – in the case of the German health group Fresenius Kabi AG ending its agreement for the United States. generic drug manufacturer Akorn Inc in 2018.
In this case, a court ruled that Akorn’s assurances to Fresenius that it was in compliance with its regulatory obligations were inaccurate. He also found that Akorn covered up facts about his deteriorating performance that emerged in the whistleblowers’ allegations.
Legal experts dismissed the idea that inaccurate spam account numbers would amount to an EAW for Twitter on the same level as the issues plaguing Akorn.
“If the case goes to court, Musk bears the burden of proving that it’s more likely than not that the spam account numbers were not only wrong, but were so wrong that it will have an effect significant impact on Twitter’s revenue going forward,” said Ann Lipton, associate dean for faculty research at Tulane Law School.
Musk also claimed that Twitter violated their agreement by firing two key high-ranking employees, its chief product officer and chief consumer officer, without his consent, as required by their contract.
“That’s probably the only claim that has a buy,” said Brian Quinn, a professor at Boston College Law School, but added that he didn’t think the layoffs were serious enough to affect Twitter’s business.
In 2020, the Delaware court allowed South Korea’s Mirae Asset Capital Co to walk away from a $5.8 billion luxury hotel contract because the pandemic caused the seller, Anbang Insurance Group of China, to change its ordinary hotel operations.
SETTLEMENT RATHER THAN DISPUTE UNTIL THE END
Most of the time, the courts rule in favor of the target companies and order the acquirers to complete their transactions – a legal remedy known as “specific performance”.
In 2001, for example, Tyson Foods, America’s largest chicken processor, decided it no longer wanted to buy the largest meat packer, IBP Inc. A judge ordered the deal closed.
However, many companies choose to settle with their acquirers to put an end to the uncertainty about their future which can weigh on their employees, customers and suppliers.
This happened more frequently when the COVID-19 pandemic broke out in 2020 and caused a global economic shock. In one case, French retailer LVMH (LVMH.PA) threatened to walk away from a deal with Tiffany & Co. The US jewelry retailer agreed to drop the acquisition price from $425 million to $15.8 billion. dollars.
Simon Property Group Inc (SPG.N), the largest operator of shopping centers in the United States, has managed to reduce the purchase price of a majority stake in rival Taubman Centers Inc by 18%, to 2.65 billions of dollars.
Other companies let acquirers walk away in exchange for financial compensation. That includes medical technology company Channel Medsystems Inc, which sued Boston Scientific Corp (BSX.N) for trying to pull out of their $275 million deal. In 2019, a judge ruled the deal should go through, and Boston Scientific paid Channel Medsystems an undisclosed settlement.
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Reporting by Tom Hals in Wilmington, Delaware; additional reporting by Hyn Joo Jin and Krystal Hu Editing by Greg Roumeliotis & Shri Navaratnam
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