People familiar with the matter said Twitter plans to file a lawsuit this week. By hiring Wachtell, Lipton, Rosen & Katz LLP, Twitter will have access to barristers including Bill Savitt and Leo Strine. Strine was president of the Delaware Court of Chancery, where Twitter’s lawsuit will happen to be heard.
Musk, meanwhile, has hired Quinn Emanuel Urquhart & Sullivan LLP, the firm that helped him successfully win a defamation complaint lawsuit in 2019 and is representing him in the current shareholder lawsuit involving his attempt to take Tesla private in 2018.
Delaware is home to more than half of all publicly traded U.S. companies, including Twitter, and to more than 60 percent of Fortune 500 companies. There, justices can hear cases without a jury, but cannot award punitive damages. Previous M&A cases have shown that litigation to terminate a deal can end within months, often ending in a settlement to avoid further contentions.
Savitt is a partner at Wachtell, Lipton, Rosen & Katz LLP and a leading litigator in equity courts. In Delaware, companies such as health insurer Anhim, real estate giant Sotheby’s and financial giant KKR & Co. have turned to Savitt when deals have fallen through or acquisitions have been challenged.
Sterling, who spent more than 20 years in Delaware courts and most recently served as chief justice of the state’s Supreme Court, has helped shape many legal norms related to mergers and acquisitions. Sterling joined Wachtell, Lipton, Rosen & Katz LLP in 2020, and prior to becoming chief justice, Sterling served as a Delaware chancellor since 2011 and as an associate justice since 1998.
The Delaware Court of Chancery has generally disapproved of efforts to withdraw from merger agreements, and Musk will need to prove that he has a legal basis for abandoning his acquisition of Twitter. In the regulatory filing, Musk’s lawyers said Twitter’s failure or refusal to respond to multiple requests for information about fake or spam accounts on the platform was critical to the company’s business performance. The filing states, “Twitter materially violated multiple terms of the Acquisition Agreement by making false and misleading statements in the information Musk relied on to enter into the Merger Agreement.”
Musk also said he decided to abandon the acquisition because Twitter fired several senior executives and one-third of its talent acquisition team, violating its obligation to leave “substantially intact the organizational components of its existing business.
There is ample precedent for renegotiating M&A agreements, and several companies repriced agreed-upon deals in 2020 when the Newcastle pneumonia outbreak triggered a global economic shock. For example, French retailer LVMH threatened to back out of its deal with Tiffany & Co. but ultimately agreed to reduce the purchase price by $425 million to $15.8 billion.
In 2000, Tyson Foods Inc. agreed to buy rival IPB Corp. But shortly after agreeing to the deal, the meat market plummeted and both companies’ finances suffered. Tyson argued that IBP had provided misleading information about its business, so it was no longer obligated to complete the $3.2 billion merger.
In court, Sterling disagreed that there had been a material adverse change at Tyson and ruled that Tyson must insist on completing the deal. The ruling became a milestone, and Tyson-IBP remains an important reference point for courts and companies to interpret the buyer’s ability to terminate the merger agreement.
Ann Lipton, associate dean for faculty research at Tulane University Law School, said, “I would say that Twitter is in a strong legal position to argue that it provided all the necessary information to Musk, who was looking for an excuse to back out of the deal.”
But Daniel Ives, an analyst at Wedbush Securities, said Musk’s exit is bad news for Twitter. “It’s a disaster for Twitter and its board because now the company will be in a protracted lawsuit with Musk to close the deal or get a minimum $1 billion breakup fee,” he said.
The judge also had a say in whether the first party to exit the deal must pay a “break-up fee. In the case of the Musk-Twitter deal, the fee was $1 billion. Twitter Chairman Bret Taylor responded and insisted that the deal be enforced in what would be a tough court battle.
After Musk took a stake in Twitter in early April, the stock price soared, saving it from a sharp stock market sell-off. But after he agreed to buy Twitter on April 25, Twitter shares began to fall within days as investors speculated that Musk might back out of the deal. With the plunge after the opening bell on Friday, Twitter shares fell to their lowest level since March.
