It was the buyout deal heard round the world — mostly because it involved Twitter, which every professional journalist is obsessed with, even if they claim not to be. Elon Musk, CEO of Tesla and SpaceX, was taking over the social media platform.
But then earlier this month, he suddenly backed out. Now Twitter, which took some cajoling to agree to the arrangement in the first place, is suing Musk to force him to complete the $44 billion purchase. Or at least that’s what the social media company says it is seeking in the suit, which was filed in Delaware Chancery Court on Tuesday.
Can that really be what Twitter wants at the end of the day, to be owned by someone who no longer wants to own it? Although one could argue that Twitter executives and the board have a fiduciary duty to shareholders to get the highest price possible, it still seems like a strange prospect. However, like with any big legal battle, there is more going on in the subtext than what you can see written in the complaint. There is a gamesmanship afoot here.
Here is a quick run down of three options for what Twitter’s real goal might be at the end of the day.
Making Musk buy Twitter
Ok, first let’s start by reading the complaint at face value. In it, Twitter accuses Musk of breach of contract and demands “specific performance” as a remedy. Essentially, that means: “follow through on the thing you said you were going to do.”
Musk offered to buy Twitter at $54.20 per share (the “420” part being presumably a weed reference), or at a 38% premium, back in April. The deal valued the entire company at about $44 billion. Since that time, Twitter’s stock hasn’t performed all that well. It’s lost about a quarter of its value since Twitter accepted the bid. If Musk is ordered to make good on his word, he’ll definitely take a financial hit.
In advance of formally terminating the deal on July 8, Musk had made a number of public statements (namely via tweets) alleging problems, including claims that Twitter either misrepresented or did not provide adequate information about the number of “bots” that exist among its roughly 450 million users. Twitter countered in its lawsuit that the public attacks about fake users were baseless, and were conjured by Musk because he “wanted an escape.”
Based on the contract, the only way out of the deal was for there to be a “material adverse effect” which significantly changed the value of the company, or if Twitter made a material breach of covenants. Twitter says the “bot” issue was asserted as a pretext for making one of those claims.
It’s possible that Musk might agree to go forward with a deal but at a lower price, making this whole dance and legal mess just a costly negotiating tactic.
Sweetening the pot
A more plausible scenario is that Twitter may be trying to leverage a generous cash payout. Although the complaint does not seek monetary damages, there is nothing that limits the terms of any out-of-court settlement. Whatever makes both parties happy will make the court happy.
Under the agreement, Musk is obligated to pay $1 billion if he walks away. So we can probably safely assume that any settlement would be aiming for a higher number than that. No dollar amount is described in the suit, but law professor at Tulane University, Ann Lipton, told Quartz that the amount could be considerable.
“It appears that Musk has caused a lot of damage in terms of internal chaos and public disparagement, and so if Musk does not buy the company, and does not pay a very large dollar figure in settlement, Twitter will be worse off simply as a functioning business,” Lipton said.
Crippling Musk (or trying to, anyway)
There is another, perhaps underappreciated, reason rich executives go to court: to get revenge. Twitter executives may well be fed up with watching their company suffer from Musk’s hot-and-cold takeover whims. Musk may be the richest man on Earth, worth about $225 billion as of today, but he has also amassed a fair number of enemies who will be looking to strike a weak point.
One possible weak point for Musk is that virtually all of his wealth is tied up in his companies’ stock, with a significant portion coming from his 17% stake in Tesla. And as a result, his fortune can easily rise and fall by billions of dollars on any given day, depending on how markets and his companies perform. His net worth has definitely dropped by a lot over the past couple of months as the economy faltered.
If the Chancery court rules for Twitter, and forces Musk to close the deal, he will have to sell a lot of stock and pay $33.5 billion of his own money (under the terms of the contract). This would be a pretty uncomfortable situation both for Musk and for Tesla, which undoubtedly would suffer a major drop in its stock price. A huge drop in Tesla’s price would also tank Musk’s overall net worth, and now you might be starting to see how this can create serious setbacks for him.
As an added bonus for Twitter, the lawsuit will likely draw interest from the U.S. Securities and Exchange Commission, which could start examining his tweets over the deal for signs of misleading the market (which is illegal). Granted, Musk has run afoul of SEC regulations before and the sanctions were de minimis for him. But this time, if the SEC finds fire behind the smoke, it could get worse.