Elon Musk’s Pursuit of Twitter Leads to Complicated Next Steps and Legal Questions

Whether smokescreen, negotiating tactic, genuine concern or flight of fancy, Mr. Musk’s insistence that Twitter is overrun by spam bots has upended a deal that was eccentric from the outset and left both sides in difficult positions.

Twitter shares continue to slide, and they fell nearly 4% Wednesday to $36.85 in a broad stock selloff, a sign that investors no longer believe that Mr. Musk’s cash offer of $54.20 per share—now 47% above market price—will stand. For Twitter’s board, securing that price would be a victory, and it said it intends to close the deal and enforce the merger agreement.

Its other options seem few. Twitter makes about 90% of its revenue from digital advertising, a slumping market. Chief Executive Parag Agrawal, who has described himself as a lame duck, has announced a hiring freeze and spending cuts to employees and signaled more changes may be ahead. Several high-ranking executives have recently left.

Mr. Musk, for his part, while still the world’s richest person, has gotten considerably poorer: Tesla Inc. shares, which are the bulk of his fortune, have fallen 31% since he offered to buy Twitter. He has sold about $8.5 billion in Tesla shares and needs to borrow against more to fund the deal. Getting out of spending $44 billion on a social-media company would take pressure off his finances.

Mr. Musk’s insistence that Twitter provide more information on spam bots has been particularly suspicious because of his history on the issue. He has been well aware of it for years—tweeting about it at least as early as 2018—and he said in the days immediately before and after he struck the deal with Twitter that part of his goal was to “defeat the spam bots” and “clear out bots, spam & scams.”

Twitter’s own estimate that such accounts represent fewer than 5% of its monetizable daily users has been in its regulatory filings for years. Yet Mr. Musk never brought his concerns up as part of deal negotiations with Twitter, according to people familiar with the matter and a detailed account of the talks in a Twitter proxy filing on Tuesday—and he waived the detailed due diligence that buyers typically perform on targets before closing.

A deal is (usually) a deal; the buyer and the seller sign a contract stipulating what each side will do to ensure it is completed, and what legal rights each has if the other doesn’t hold up its end of the bargain. But nothing is usual with Mr. Musk. He filed forms with the Securities and Exchange Commission asserting that he had only a passive interest in Twitter shares when—in Twitter’s account—he had days before told Twitter he was thinking of taking the company over. His forms were late. He agreed to join Twitter’s board and then didn’t.

Lawyers say the contract provides Mr. Musk few ways to back out. One is if the banks who agreed to finance the deal fail to lend him the money. Another is if regulators block the deal. A third is if Twitter has changed significantly for the worse since the deal was signed, a concept known as a “material adverse effect.”

What’s more, Mr. Musk negotiated fast and agreed to a contract with several seller-friendly features. One gives Twitter the right to ask a court to make him follow through with the deal, a legal clause called “specific performance.”

“The agreement doesn’t really give a clean exit,” said Andrew Freedman, a partner at Olshan Frome Wolosky LLP.

But suing Mr. Musk, who has 94 million Twitter followers, isn’t simple either. Seeking specific performance means asking a Delaware judge to force him to go through with the purchase.

That happened with

LVMH Moët Hennessy Louis Vuitton SE’s

takeover of Tiffany & Co. The deal was struck for $16.2 billion in November 2019. Then the pandemic gutted the jewelry business. In September 2020, LVMH said it was backing out, citing a French ministry’s request to delay the deal. Tiffany sued in Delaware, demanding that LVMH be compelled to buy it. The two sides fought for months before agreeing to proceed at a slightly discounted price.

Lawyers say specific performance is a difficult remedy to win at trial; often specific-performance claims are preludes to negotiations or settlements. But Mr. Musk may be in a difficult spot, in part because he has banks lined up to finance a large part of the deal.

“I think Musk has got some real problems,” said Allan Diamond, a veteran litigator and managing partner at Diamond McCarthy LLP. “In order to get out of this deal and get out from the specific-performance obligations when he has the debt financing lined up, he’s going to have an uphill climb proving there was a material change in Twitter’s business.”

Write to Cara Lombardo at [email protected]