Twitter officially filed suit against Elon Musk on Tuesday, over the billionaire’s pulling out of his buyout deal for the social media giant.
Twitter filed the lawsuit in Delaware Chancery Court on July 12th, asking for one of the Court’s Chancellors to force Musk to buy the company as per his April 25th merger agreement. In the agreement, Musk had agreed to acquire the company for $54.20 per share, at a cost of roughly $44 billion. Twitter is currently trading at roughly $34 per share.
Delaware’s Chancery Court is a 230 year old Court in Delaware formed under the State Constitution as a Court of Equity, rather than a Court of Law, which allows it to reach more flexible resolutions to the business disputes it is often tasked with resolving. The Court typically makes decisions in cases which are not explicitly addressed by the law, and where one party is looking for a remedy that goes beyond mere monetary damages. The Chancellor, who functions as a chief judge, and the six vice-chancellors, are experts in business law, and are nominated by the Governor, and confirmed by the State Senate. Due to so many companies being registered in Delaware, and so many suits being brought before them, the Delaware court is viewed as having particular expertise in resolving business disputes.
In the breach-of-contract lawsuit, Twitter alleges, “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.”
Twitter claims that Musk’s tactics could inflict irreparable harm on the company and its reputation among investors, and it requests “swift” action to force Musk to complete his deal.
For his part, Musk has alleged that Twitter violated several different aspects of their agreement, most notably by withholding data from him which would allow him to verify the number of non-monetizable fake accounts on the platform. Musk maintains he cannot verify Twitter’s value to facilitate his financing of the deal, without access to the information, while Twitter maintains it cannot provide the data without violating user privacy.
Twitter however alleges all of Musk’s arguments are merely the billionaire seeking an “out” because after he made his offer the market began declining and Twitter’s stock is now far less valuable. The lawsuit says, “Musk wanted an escape. But the merger agreement left him little room.”
The agreement contains a “specific performance” clause, which allows the parties to request a court to force the deal to be completed. It also features a $1 billion “reverse breakup” fee that would allow Musk to walk away from the deal, but that is only operative under certain conditions, such as if government regulators prevented the merger, or if his financing fell through.
Musk’s Twitter saga began on April 4th, when he announced he intended to buy Twitter, acquiring all of its outstanding shares at a price of $54.20 each, a 38% premium over what it had been trading at, at the time. He said the two major reasons he was buying the company were to protect free speech, and to eliminate the fake spam bot accounts on the platform.
On May 13th, Musk issued a tweet which indicated the deal was in jeopardy. He noted the deal was temporarily on hold pending verification of Twitter’s assertion that fake bot accounts accounted for fewer than 5% of monetizable daily active users. Since then Musk as speculated that as many as 20% of Twitter’s user base is in fact fake, but said he cannot verify it one way or another without access to data that Twitter refuses to supply.
Twitter has argued it cannot supply the data on user identities to an outsider like Musk without violating user privacy.
Musk now has 20 days from when he is served with this lawsuit to file his answer to the various claims.