Why Twitter has upper hand in its legal fight with Elon Musk

Twitter is expected to file a lawsuit in a Delaware court in the coming days in an effort to force Tesla CEO Elon Musk to follow through on a $44 billion buyout agreement — and legal experts think the social media company has a stronger hand to play.

Musk on Friday filed papers with regulators stating his intention to back out of the deal. Twitter shares fell 7% in premarket trading on Monday.

The world’s richest man posted a meme on Twitter showing him laughing at the company for its alleged refusal to provide him information on bots and spam accounts. Musk made light of the fact that Twitter will have to disclose the data in court.

His attorneys alleged that “Twitter is in material breach of multiple provisions” of the buyout deal, and that the company “appears to have made false and misleading representations upon which Mr. Musk relied when entering into the Merger Agreement.”

Musk backed out of the deal after Twitter failed to provide information about fake accounts on the platform, court documents filed by his team claimed.

Ann Lipton, a professor of corporate governance at Tulane Law School, told CNBC that she was doubtful Twitter did what Musk has alleged.

Even if Twitter did mislead him, it still would not be grounds to cancel a merger agreement, according to Lipton.

She said that Musk would have to prove in court that Twitter made false statements that were egregious to the point where it would have a long-term, negative impact on the social media company’s earnings potential.

“He has yet to put forth evidence that that is in fact the case,” Lipton said. 

Twitter is likely to initiate legal action in a Delaware court in the coming days.
Twitter is likely to initiate legal action in a Delaware court in the coming days.
Anadolu Agency via Getty Images

Legal analysts note that the merger agreement contained a “specific performance clause” that gives Twitter the right to sue Musk to force him to follow through on the deal as long as the financing is in place.

“He (Musk) makes a number of legal arguments — I think all of questionable standing,” Adam Sterling, the executive director of Berkeley Center for Law and Business, told CNBC.

”(He) first focused on bots on the platforms but also performance of the company so, he’s kind of throwing all these arguments out there.”

It is unclear whether Musk, who committed to buy out stakeholders at $54.20 a share, simply wants to renegotiate in order to bring the price point down.

It is also unlikely that Musk will agree to pay the $1 billion breakup fee.

Sterling added: “Twitter appears to have a very strong legal argument but we’ve not seen a precedent at this scale or an opponent like Elon Musk so, there’s many questions about what he will do.”

Twitter appears determined to pursue legal action.

“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,” Bret Taylor, the company chairman, wrote in a tweet. 

“We are confident we will prevail in the Delaware Court of Chancery.”

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