Musk moved to back out of the deal Friday, claiming the San Francisco-based social media giant refused to turn over key data on the number of fake accounts that make up its active daily user totals. Musk said he relied on the company’s claims when making his bid, but then was denied the ability to verify them.
“Material Adverse Effect,” was cited by the Tesla chief’s attorneys in a Securities and Exchange Commission filing Friday.
Invoking the phrase means Musk believes Twitter did not act in good faith during the due diligence period, and their actions negatively affected his ability to fairly gauge his own position. Whether Twitter’s alleged deception occurred or was enough to warrant ending the deal will be decided in court.
Elon Musk Terminates Twitter Purchase Deal, Citing Material Breach of Agreement by Company Refusing to Provide Access to Datahttps://t.co/LRsm6Qr7JH
— TheLastRefuge (@TheLastRefuge2) July 8, 2022
Musk will have to prove Twitter’s omissions amounted to an “unexpected, fundamental, permanent” negative development, Larry Hamermesh, a University of Pennsylvania law professor, told Bloomberg.
Judges have been hesitant to find acquisition targets’ meet the threshold for material adverse effect.
“Terminating a merger deal based on a MAE is extremely difficult, and has only happened once in history,” Accelerate’s Julian Klymochko told Benzinga.com, citing a 2018 case in which drugmaker Fresenius was able to drop its $4.3 billion bid for rival Akorn after learning Akorn executives hid problems with data needed for approval of some drugs and was not forthcoming about its profitability.
A Delaware judge defined material adverse effect in a 2020 case involving Boston Scientific as an “adverse change in the target’s business that is consequential to the company’s long-term earnings power over a reasonable period, which one would expect to be measured in years rather than months.”
Twitter said in a statement Friday night that it is prepared to fight Musk in court.
“We are committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plan to pursue legal action to enforce the merger agreement,” the company said.
Klymochko predicted that Musk will come back with an offer lower than his $54.20-per-share deal before the case ever gets to trial.
“Musk closing the Twitter acquisition at a reduced price is the most likely scenario, given a trial will be highly uncertain for both parties,” Klymochko said. “The market has always heavily discounted the probability of this deal closing on the original terms, as indicated by the large discount to $54.20 that Twitter stock has traded at consistently.”
Twitter shares fell in after-hours trading Friday by nearly 5%, to $35.05.