Even by the rollercoaster standards of Elon Musk’s $44bn bid for Twitter, July has proved a wild ride. First, the billionaire decided he was walking away from the deal. Twitter promptly sued Musk, asking a court to force him to buy the platform. The court on Tuesday agreed to an expedited trial in October. Meanwhile, the US securities watchdog is scrutinising why Musk did not officially inform investors before tweeting that the transaction could not move forward; the second lot of attention he faces from the Securities and Exchange Commission on this deal alone.
In other circumstances, this would be extraordinary. For the world’s richest man — who has never really advanced compelling arguments why he wanted to buy Twitter, nor credible reasons why he changed his mind after a market rout — it seems entirely apt. That the saga should ultimately play out in court seems fitting for a man who has shown disdain for the rule of law: Exhibit A is his 2018 tweet goading the SEC days after settling fraud charges.
The chancery court in Delaware, the state where most American companies are incorporated, must now weigh the most equitable outcome based on the contract. It could side with Musk and let him walk away for nothing. His official reasons for abandoning the deal include that Twitter may have materially misstated its number of “bot” accounts. This is despite the fact he previously said he wanted to buy the company precisely to rid it of bots. He is yet to provide evidence to back up his claim, which Twitter denies and claims is a “pretext” for buyer’s remorse.
The contract sets out a $1bn break fee, in certain circumstances, and a belt-and-braces “specific performance” clause, which stipulates deal completion. Twitter is arguing this must now be honoured because all sale conditions will be met. This clause was written into a seller-friendly contract that was agreed after Musk waived his right to due diligence. This means Musk cannot walk just because he changes his mind.
“Specific performance” is a nuclear option, but not unprecedented. In 2021, Judge Kathaleen McCormick ordered a private equity firm buying a cake decorator to pay $550mn as agreed, even after the market turned. She is now the chancellor of the court and presided over Tuesday’s hearing.
Ordering specific performance could be right contractually, and good for Twitter shareholders. But it would be bad for almost everyone else, not least Musk, who has personally committed $33.5bn. It would be terrible for Twitter itself and its users, who would be saddled with an unwilling owner who has spent weeks — according to its own court filings — trashing the company. It would also raise the stakes for the credibility of the court, faced with a defendant with a history of provocation of the SEC.
Much better would be to come to an out-of-court settlement, which is often a lawsuit’s aim even as a trial is happening. The parties could either negotiate a lower purchase price, or a higher termination fee. Twitter and its advisers ought to push the latter. The right outcome for most concerned would be to find a way for Musk to be able to walk away, while paying a stiff penalty.
Musk’s scorn for convention has helped him become an entrepreneur who can turn electric carmakers and space rockets into some of Wall Street’s most attractive companies, inspiring legions of followers — including 102mn on Twitter. But sometimes rebelliousness can tip into recklessness, which is why flouting the rules of the game is so dangerous when the player is as influential as Musk. The court will let justice prevail, but a better outcome may be reached on the court’s steps.