Elon Musk’s Plan To Buy Twitter Put On Hold—OR Is It?

I can’t really say that I was surprised this morning while my phone was blowing up with media requests due to Musk’s latest tweet that the Twitter

TWTR
deal is on hold. Because I’m not surprised. Don’t forget it’s Friday the 13th.

Can Musk put the deal on hold?

Unless this was just a “joke”, it looks like Musk is suffering a serious case of buyer’s remorse.

Everybody is familiar with the basic feeling. Charlie Korsmo and I discussed buyers trying to get out of M&A deals during the pandemic.

Imagine buying a big-screen TV at full price only to see it on sale for 50% off just a few weeks later. Now imagine agreeing to pay billions for an online social media platform, only to see that the stock price is plummeting, some prominent people threaten to boycott the platform, or just leave it altogether, with no end in sight?

That is the unenviable situation that Musk finds himself in, not to mention lots of legal issues.

Legal Trouble

For starters, Musk faces legal problems on several fronts this week in courts around the country.

Here are some of the highlights:

In California, a federal judge decided his 2018 tweets about securing funding to take Tesla private were “inaccurate and reckless.”

In Delaware’s Court of Chancery, Musk now faces a potential class action lawsuit attempting to block his attempted acquisition of Twitter. In this suit, the plaintiff alleges Musk’s acquisition is a violation of Section 203 of Delaware’s General Corporate Law. If this is true, Musk could be prohibited from completing the merger until at least 2025.

Meanwhile the SEC has also entered the fray with the Wall Street Journal reporting the regulator is probing Musk’s late disclosures related to his initial acquisition of his 9.2% stake in Twitter.

As I’ve previously noted, Musk was required to file a disclosure within 10 days of acquiring 5% of the company but waited until he had done so. In that intermediate period, he acquired an additional 4.2%.

Can the SEC do anything about this? The short answer is yes, but the more important question relates to what they’ll do about it. Or, perhaps more importantly, will SEC officials even bother. The measures the SEC will take will probably depend on whether Musk manipulated the market.

Back to the courts. Musk already faces a second-class action suit in federal court by other Twitter investors for this deal, alleging his failure to disclose cost them in excess of $150 million.

Musk informed the public—fittingly, on Twitter—that the deal is on hold. He also immediately tweeted afterward that he is still committed to the acquisition, even with the delay.

What’s next?

I’m not sure if he will pull out of the deal or not.

If he does, lawyers around the globe are going to be spending considerable time in the next few months, if not years, analyzing and studying agreement provisions governing the rights of Musk to walk away.

Indeed, as I explained before, generally, the “Material Adverse Effect” (“MAE”) clause is a fairly shaky ground for buyers to stand on. Not only is the standard for what constitutes a MAE extraordinarily high, but most MAE clauses exclude systemic risks from the definition of a MAE.

I’m not sure if Twitter is going to try to enforce the agreement and make Musk follow through. Not to mention what the courts or financiers do about these new developments.

One thing is clear though, Musk continues to provoke the ire of the SEC with such statements. Twitter shares dropped significantly with his initial tweet and the delaying period may be enough to be considered market manipulation.

One might even say that these tweets were, to borrow from a federal judge, “inaccurate and reckless.”

Thank you to my research fellow, John Livingstone. If you have any comments, suggestions or feedback, please send them to John Livingstone [email protected] or to me [email protected]