Twitter, Elon Musk Set for Unprecedented Authorized Battle Over Deal’s Collapse

Company regulation consultants say Twitter seems to be on sounder authorized footing than Mr. Musk, who accused the corporate of breaching their contract. The larger query, they are saying, is that if Twitter succeeds in court docket, is it actually attainable to power the eccentric billionaire—identified for eschewing norms even when it will get him in authorized hassle—to purchase an organization he doesn’t wish to personal?

“What are they going to do if there’s a judgment and he says, ‘Effectively, I’m nonetheless not going to purchase it’?” mentioned Zohar Goshen, professor of transactional regulation at Columbia Legislation College. “They don’t actually have instruments to power him to undergo with it. You don’t put folks in jail as a result of they don’t purchase one thing.”

There’s little precedent to attract on. Although there have been a handful of examples of patrons being compelled to comply with by with purchases beneath the “specific-performance” clause that Mr. Musk agreed to, most had been small offers. By no means has the idea been examined on such a giant scale.

Apollo International Administration Inc. in 2008 was ordered by a Delaware decide to make its finest efforts to shut its $6.5 billion deal to purchase chemical maker Huntsman Corp. after the private-equity agency tried to again out. (The 2 sides finally settled, with Apollo agreeing to pay a hefty charge as an alternative.)

Mr. Musk in a Friday submitting moved to terminate the deal, along with his Skadden, Arps, Slate, Meagher & Flom LLP lawyer Mike Ringler arguing that Twitter breached their contract. Mr. Musk alleged that the corporate seems to have misrepresented the variety of spam accounts on its platform, didn’t present his staff with all the knowledge requested, together with information to look at the problem, and fired executives and made different modifications to its enterprise with out permission.

Mr. Musk’s staff says Twitter’s longtime estimate that fewer than 5% of its monetizable every day energetic customers are spam accounts seems inaccurate, and due to this fact might symbolize a “materials opposed impact.”

Below this idea, a purchaser should present that an organization’s precise enterprise differs dramatically from what it agreed to purchase. It’s a excessive bar that only a few patrons who’ve gotten chilly toes have ever efficiently invoked.

Mr. Musk’s submitting didn’t present proof to again up his assertion that the estimate was inaccurate or an alternate calculation. Relatively, his lawyer wrote, “Mr. Musk has cause to imagine” that the true variety of spam accounts is “considerably greater” than Twitter’s estimate.

“This isn’t even within the ballpark,” Mr. Goshen mentioned of the argument, including that the affect on an organization’s worth must be so dramatic that its worth could be halved, for instance. He recollects just one occasion of a purchaser efficiently backing out of a deal on the idea of a cloth opposed impact: In 2018, healthcare firm Fresenius SE bought out of a deal to purchase Akorn Inc. over alleged information breaches.

Mr. Goshen was equally skeptical of Mr. Musk’s argument that Twitter didn’t adequately reply to his staff’s requests for data regarding the bot estimate. The contract requires Twitter to offer no matter data is fairly required to finish the deal and doesn’t hurt its enterprise.

Twitter will doubtless argue it supplied Mr. Musk with extra data than is cheap—giving him entry to its fireplace hose of knowledge in latest weeks—and make the declare that he seems to be requesting the knowledge for the aim of backing out of the deal, which is way from the meant function, Mr. Goshen mentioned. He isn’t conscious of a case by which a deal fell aside over data entry, although such arguments have resulted in worth cuts.

Mr. Musk’s lawyer additionally argued that Twitter ought to have sought his consent earlier than firing two executives and shedding a 3rd of its talent- acquisition staff, beneath part of the contract that requires the corporate to not unreasonably intervene with the enterprise earlier than the deal closes. Of all of the arguments, this is perhaps the strongest, Mr. Goshen mentioned. Nonetheless, it isn’t clear that the corporate’s actions had been drastic sufficient to be thought-about unreasonable.

Most authorized clashes over soured offers finish in settlements, with either side agreeing to a worth reduce or a one-time fee. Mr. Musk agreed to pay a $1 billion reverse termination charge to Twitter if the deal falls aside, although that’s solely triggered beneath sure eventualities together with if his debt financing falls by or regulators attempt to block the deal. The settlement caps at $1 billion the quantity Twitter might sue for damages for, that means its solely choices proper now are to sue for particular efficiency or a most of $1 billion, a tiny fraction of what it stands to lose out on ought to the deal crumble.

If it sues for particular efficiency and Mr. Musk agrees to settle, that might contain a fee of greater than $1 billion.

Twitter is in a precarious place provided that its prospects as a stand-alone firm are daunting, due partly to a digital promoting market in upheaval. Twitter shares closed at $36.81 Friday, or 32% under the $54.20-per-share worth that Mr. Musk agreed to pay.

Wedbush Securities analyst Daniel Ives on Saturday referred to as Mr. Musk’s strikes a “nightmare” for Twitter because it faces the prospect of a chronic authorized battle. He estimated its inventory might sink to $30 if the deal collapses.

For Mr. Musk, there’s important monetary incentive to both drop the deal fully or negotiate a worth reduce. Expertise shares, together with these of Twitter’s friends, have sunk since he first made his provide, and the Tesla Inc. chief govt has misplaced billions in private wealth as shares within the electric-car firm have additionally dropped. He already offered $8.5 billion value of Tesla inventory, doubtless to assist pay for the deal, and will the deal undergo, he could be on the hook to contribute $33.5 billion in fairness.

Write to Cara Lombardo at cara.lombardo@wsj.com