Last week, Elon Musk said he was ending his bid to buy Twitter ( TWTR ) — prompting the social media platform to fire back almost immediately, calling his effort to terminate the deal “invalid and wrong.”
So what’s next? It already became more so on Tuesday, when Twitter filed a lawsuit against Musk, seeking a court-ordered settlement. He could end up being on the hook for a $1 billion back-termination fee, and on top of that, the merger agreement contains a “specific performance” clause that could theoretically force the Tesla ( TSLA ) CEO to close the deal.
“There’s never been anything this high-profile that touches on specific performance,” Mark Boidman, head of media and entertainment at Solomon Partners, told Yahoo Finance before the lawsuit was filed.
This situation is “rather rare” on several levels, he added.
“There just aren’t many cases of this size or scope where a court goes through and forces the parties to execute an agreement,” Boidman told Yahoo Finance. “Still, if a court finds that there is a violation, I can’t imagine that the court won’t make the buyer go through the deal just because of the size.”
In April, when Musk first time offered to buy Twitter, he came in and said he would get rid of the company’s alleged restrictions on free speech. However, that was a different time, as the market has fallen since then. So far in 2022, Twitter’s shares have declined north of 20%, which while far from the worst we’ve seen amid the tech crash, isn’t optimal.
Musk claims he’s terminating the contract because the company won’t disclose the extent to which Twitter’s user base is made up of bots. However, Twitter and others think this is a pretext, and the social media giant has vowed to sue Musk in Delaware.
That said, the size of the deal matters and the escalating court battle is likely to be a long one. Even a billion dollar termination fee doesn’t have a long history on this scale. Under the contract, reverse termination fees — including the one Musk faces to potentially pay Twitter — are paid by the buyer when it doesn’t complete the deal. It is usually triggered when funding falls through. However, it wasn’t until 2008 that mega-deals started having such termination fees on the books, Boidman said.
These termination fees have also evolved and become even more common during COVID-19, according to the White & Case report. For example, the second quarter of 2020 saw 100 contract terminations, a quarterly high not seen since 2018. Although contract breakdowns have stabilized by 2021, the report claims that it is still an issue that both contract makers and companies are closely watching.
Additionally, it’s pretty hard to get out of a deal if you can’t prove a “significant adverse event” — a change in circumstances that massively and negatively affects the value of the company. Musk may or may not prove it in court, but at least one Wall Street analyst likes Twitter’s prospects.
“We remain cautiously optimistic that Twitter can implement the agreement, although we recognize that this could drag on for some time,” Raymond James analyst Aaron Kessler wrote on July 11, a day before the lawsuit was filed.
“At this point, we believe the onus is on Mr. Musk to prove that a material adverse event has occurred,” Kessler added.
A few precedents
A key case that experts have identified as a possible precedent is IBP Inc. v. Tyson Foods Inc. More than two decades ago, when multinational food giant Tyson tried to walk away from its acquisition of beef processor IBP, a Delaware chancery court forced Tyson to end the deal. Although Tyson tried to argue that IBP had failed to disclose accounting problems earlier and that the company’s performance had declined, the court was not convinced.
Finally, could the deal even apply to Musk and Twitter? That deal — which was pulled in 2001 — was worth $3.2 billion at the time, a relatively small sum compared to the $44 billion Musk was originally willing to give Twitter.
There are a number of reasons why Musk’s Twitter feud is so anomalous, but there’s also a simple one that’s easy to overlook. Buyers just don’t walk away from a deal this big that often, and when they do, it’s usually because there are antitrust concerns, Boidman says.
“Most people don’t pay break fees because they’ve changed their minds, so it’s going to come down to whether Twitter breached the agreement,” he said.
Allie Garfinkle is a senior technical reporter at Yahoo Finance. Find her on twitter @agarfinks.
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