Elon Musk, the chief executive officer of Tesla and the world's richest person, said on Friday he was terminating his $44 billion deal to buy Twitter because the social media company had breached multiple provisions of the merger agreement.
Twitter's chairman, Bret Taylor, said on the micro-blogging
platform that the board planned to pursue legal action to enforce the merger
agreement.
"The Twitter Board is committed to closing the
transaction on the price and terms agreed upon with Mr. Musk...," he
wrote.
In a filing, Musk's lawyers said Twitter had failed or
refused to respond to multiple requests for information on fake or spam
accounts on the platform, which is fundamental to the company's business
performance.
"Twitter is in material breach of multiple provisions
of that Agreement, appears to have made false and misleading representations
upon which Mr. Musk relied when entering into the Merger Agreement," the
filing said.
Musk also said he was walking away because Twitter fired
high-ranking executives and one-third of the talent acquisition team, breaching
Twitter's obligation to "preserve substantially intact the material
components of its current business organisation."
Legal Battle
Musk's decision is likely to result in a protracted legal
tussle between the billionaire and the 16-year-old San Francisco-based company.
The Twitter Board is committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plans to pursue legal action to enforce the merger agreement. We are confident we will prevail in the Delaware Court of Chancery.
— Bret Taylor (@btaylor) July 8, 2022
Disputed mergers and acquisitions that land in Delaware
courts more often than not end up with the companies re-negotiating deals or
the acquirer paying the target a settlement to walk away, rather than a judge
ordering that a transaction be completed. That is because target companies are
often keen to resolve the uncertainty around their future and move on.
Twitter, however, is hoping that court proceedings will
start in a few weeks and be resolved in a few months, according to a person
familiar with the matter.
There is plenty of precedent for a deal renegotiation.
Several companies repriced agreed acquisitions when the COVID-19 pandemic broke
out in 2020 and delivered a global economic shock
In one instance, French retailer LVMH threatened to walk
away from a deal with Tiffany & Co. The US jewelry retailer agreed to lower
the acquisition price by $425 million to $15.8 billion .
"I'd say Twitter is well-positioned legally to argue
that it provided him with all the necessary information and this is a pretext
to looking for any excuse to get out of the deal," said Ann Lipton,
associate dean for faculty research at Tulane Law School. Shares of Twitter
were down 6 percent at $34.58 in extended trading. That is 36 percent below the
$54.20 per share Musk agreed to buy Twitter for in April.
Twitter's shares surged after Musk took a stake in the
company in early April, shielding it from a deep stock market sell-off that
slammed other social media platforms.
But after he agreed on April 25 to buy Twitter, the stock
within a matter of days began to fall as investors speculated Musk might walk
away from the deal. With its tumble after the bell on Friday, Twitter was
trading at its lowest since March.
The announcement is another twist in a will-he-won't-he saga
after Musk clinched the deal to purchase Twitter in April but then put the
buyout on hold until the social media company proved that spam bots account for
less than 5 percent of its total users.
The contract calls for Musk to pay Twitter a $1 billion
break-up if he cannot complete the deal for reasons such as the acquisition
financing falling through or regulators blocking the deal. The break-up fee
would not be applicable, however, if Musk terminates the deal on his own.
Some employees expressed disbelief and exhaustion on Friday,
publicly posting memes on Twitter, such as of a rollercoaster ride and a baby
screaming into a phone, in apparent commentary on the breakup. Employees have
worried about the deal will mean for their jobs, pay and ability to work
remotely, and many have expressed skepticism about Musk's plans to loosen
content moderation.
Digital ad woes
Musk's abandonment of the deal and Twitter's promise to
vigorously fight to complete it casts a pall of uncertainty over the company's
future and its stock price during a time when worries about rising interest
rates and a potential recession have hammered Wall Street. Shares of online
advertising rivals Alphabet, Meta Platforms, Snap and Pinterest have seen their
stocks tumble 45 percent on average in 2022, while Twitter's stock has declined
just 15% in that time, buoyed in recent months by the Musk deal.
Daniel Ives, an analyst at Wedbush, said Musk's filing was
bad news for Twitter.
"This is a disaster scenario for Twitter and its Board
as now the company will battle Musk in an elongated court battle to recoup the
deal and/or the breakup fee of $1 billion at a minimum," he wrote in a
note to clients. © Reuters
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