Malcolm ZoppiSun Oct 15 2023
Musk v. Twitter: Contract Lawyer Tells All
A Contract Lawyer Shares Their Perspective On The Musk v. Twitter Deal.
Elon Musk may be backing out of the merger agreement to ‘buy’ Twitter’s business and turn the company private to increase its business and financial performance (aka ‘Elon Musk’s deal’). Despite support from Twitter co founder, Jack Dorsey, the company’s stock price has taken a hit, the future of high ranking employees is uncertain and the bot issue remains.
Ultimately, Twitter shareholders will need to be satisfied by the board members whilst Musks’ equity financing investors may want to renegotiate the following new data on fake accounts / users and twitter’s closing stock price. One thing should be fairly certain: no party is eager to attend the Delaware court for a full-scale litigation.
Under the remedy of specific performance, Twitter’s board may be able to force Musk to go through with the purchase, as per the merger agreement. Musk could also be liable for the liquidated damages of USD one billion to the company. On the other hand, Musk spoke about the fact that Twitter’s business is not complying with disclosure obligations and has misrepresented the number of spam bots and spam accounts on Twitter, which could give rise to a claim from Musk if the merger agreement goes through.
We are going to break down the main contract law elements from a UK contract law perspective. What would be the outcome if this was a matter under the English courts’ jurisdiction? Will there be an all hands meeting or will we have another public hearing like Deep v. Heard?
What is specific performance and why is it a remedy of choice in contract law
Definition of specific performance as a remedy
Specific performance is a legal term that means a court order forcing a party to perform a specific action. It is recognised as a mandatory injunction. This is usually only used if the other option, damages, would not be appropriate. If Twitter enforced the merger agreement, Musk would be forced to buy Twitter and turn the company private.
Difficulties in being granted a specific performance order
When it comes to enforcing specific performance as a remedy for breach of contract, things are not always so straightforward. This is because for the court to grant an injunction (a mandatory order compelling someone to do something), there must be a ‘serious issue to be tried’ – in other words, there must be a good chance that the person against whom the injunction is sought will breach their contractual obligations.
The deal to buy twitter, despite it being a serious matter, does not automatically convince a court to enforce the merger agreement unless Musk’s data on spam accounts is recognised as unreliable and / or untruthful. Twitter co founder, Jack Dorsey, does recognise the issue with spam / fake users but has refrained from providing figures.
Some of the elements that must be established are
– the challenges in proving a potential breach of contract
– the challenges in proving that specific performance is an appropriate remedy
– the challenges in proving that you will be irreparably harmed if specific performance is not granted.
Several challenges can make proving this ‘serious issue to be tried’ difficult. For one, it can be hard to establish exactly what the contractual obligations are – particularly if they are complex or written in legal jargon within the deal. Even if the agreement has clear obligations, it can be tricky to prove that Musk was to buy the social media platform and turn it into a private company. Although this would be the preferred remedy for Twitter, it will be a difficult one to convince a judge to enforce.
What are liquidated damages and will Elon Musk need to pay them?
Liquidated damages are specific, predetermined sums of money that a breaching party must pay to the other party as compensation for the potential breach of contract. In this case, the amount would be USD one billion. It is likely that Twitter will be seeking for Musk to pay USD one billion for his withdrawal from the agreement.
There are a few elements that must be present in order for liquidated damages to be enforceable. First, the merger agreement must state that liquidated damages will be paid in the event of a breach, something that is said that Must and Twitter agreed. The agreement between Elon Musk and Twitter seems to entail this, hence this condition would be satisfied.
Second, the amount of liquidated damages must be a reasonable estimate of the actual damages that would be incurred as a result of the breach. This is important because, if the liquidated damages are found to be an “unreasonable estimate”, they may be unenforceable.
One billion USD, when compared to the substantial decrease in Twitter’s stock value, are likely to be seen as very reasonable. Twitter’s financial advisors, board and shareholders are likely to not see this as a valuable solution.
Third, liquidated damages must not be penal in nature. This means that they cannot be so large that they would act as a deterrent to breaching the contract, rather than compensating them for the breach. Due to the dramatic decrease in the value of the stock price of Twitter shares, which outweighs the one billion USD, it is likely that this element is satisfied.
Overall, it is more likely than not that Twitter will win if they proceed to seek liquidated damages from Musk. From a practical perspective, this is not the likely remedy that Twitter will seek to enforce as it will take too much time and it does not adequately remedy the situation.
Did Twitter commit misrepresentation regarding the fake or spam accounts on Twitter and what are their disclosure obligations towards Elon Musk?
What is misrepresentation in UK law
There are three types of misrepresentation in UK law: innocent, negligent and fraudulent.
A misrepresentation is innocent if the person making the statement did not know it was false and had no reason to suspect it might be.
A misrepresentation is negligent if the person making the statement should have known it was false but did not.
A misrepresentation is fraudulent if the person making the statement knew it was false and still made it, or deliberately made a statement they knew was misleading.
Did Twitter commit misrepresentation?
The issue with asking this question stems from how Twitter users are categorised as spam or fake accounts. Twitter may use a different method from what Musk would. However, validating twitter users individually, one at a time, may be disproportionally expensive for both Twitter and Musk, and would still result in inaccuracies nonetheless.
This is a matter of opinion and cannot be proven one way or the other, and it is likely that legal experts will have different opinions on the bot issue and on which data to be used to support their position on the fake accounts.
However, it is likely that the initial merger agreement between Musk and Twitter would have explained what method of validating Twitter accounts should be used. Given the fact Musk now wants to withdraw due to this issue, it is likely it would have been a big element of Musk’s offer originally. Therefore, either Musk did not specify enough how he wanted Twitter to deal with spam accounts or Twitter are not complying with Musk’s requests.
What are disclosure obligations in UK contract law?
Disclosure obligations are duties that mean that one party to the contract has to disclose certain information to the other to promote transparency.
There are three types of disclosure obligation in UK contract law: duty of disclosure, the duty of care, and duty of good faith.
The duty of disclosure requires a person to disclose all material information that would affect the other person’s decision to enter into the contract. To do this both parties to the agreement go through the process of Due Diligence.
The duty of care requires a person to take reasonable care to ensure that the information they provide is accurate and not misleading.
The duty of good faith requires a person to act in a fair way that would not deliberately mislead the other person.
In this case, Twitter had a duty of disclosure to Elon Musk. This means that Twitter were required to disclose all information that would affect Musk’s decision to enter into the agreement. Which, according to Elon Musk’s opinion did not happen.
Did Twitter fulfill its disclosure obligations?
It is difficult to determine whether Twitter has fulfilled all of its disclosure obligations towards Musk because determining the percentage of Twitter accounts that are bots or spam accounts is not straightforward. Different methods may be used by different parties and this would lead to different numbers of accounts being categorised as fake or spam accounts. Musk reiterated that the Twitter executives have been unwilling to comply with Musk’s request for further information, thus making him weary of whether the deal is in his best interest.
Caveat Emptor: Musk Beware
In the legal world, there is a concept known as caveat emptor. This Latin term translates to “let the buyer beware.” The idea is that when someone enters into a contract, they are responsible for doing their due diligence to ensure that they are getting what they expect.
Therefore, Musk should have done his own due diligence into Twitter and the spam accounts before making a deal Twitter to buy. However, it is often difficult for the buyer to be able to fully do due diligence as they cannot gain access to all the information of the seller, this is where Twitter would be expected to fulfil their obligations and disclose all information to Musk.
This is why the concept often clashes with another legal obligation known as the duty of disclosure, which as spoken about above, exists to prevent misrepresentation.
So what does this mean for Caveat Emptor? Essentially, it means that while buyers are responsible for ensuring that they are getting what they want from a contract, sellers also have a responsibility to be honest about what they are selling.
This can be a difficult balance to strike, and it’s one that Musk, the Tesla CEO, is currently grappling with. Should Musk have done more of his homework before looking to buy? Or is Twitter not cooperating enough to enable Musk to make an informed decision?
Tell us what you think in the comments below!
What are the remedies for misrepresentation in UK law?
The remedies for misrepresentation in UK law are rescission, damages and specific performance.
Rescission is when the contract is void and the parties are returned to their original position. For Musk this could be a useful remedy as he could step away from the deal and seek to get his money back, therefore being put in the position he would have been before the agreement to buy Twitter. However, Twitter’s stock suffered and may suffer further and recession will not put them back in the position they would have been before the agreement.
Damages is when the person who has been misled can sue for money as compensation. This would be turning the tables against Twitter by Musk possibly starting a claim (or counterclaim). This claim would be for losses he has suffered as a result of the wanting to buy Twitter but now not being able to.
Specific performance, as discussed above, is when the court orders the person who has breached the contract to perform their obligations under the contract. Musk may wish to use this to claim for loss of opportunities but it would not be the most appropriate for Musk’s withdrawal plans.
The possible outcomes for this case
- Musk pays one billion USD and walks away.
- Twitter forces Musk to go through with the deal via the remedy of specific performance.
- Musk claims misrepresentation, is released of his obligations, and possibly compensated for costs and loss of opportunity.
- Musk uses these issues as tactics to negotiate a lower price per share and the parties avoid lengthy, complex, and costly litigation proceedings.
Let’s see if Musk tweeted his opinion.
Which one do you think would or will happen? Comment below!
Find out more!
If you want to read more in this subject area, you might find some of our other blogs interesting:
- Step-by-Step Guide on How to Transfer Shares to a Holding Company
- Breach of Settlement Agreement: Consequences and Remedies Explained
- Who Gets the Money When a Company is Sold?
- What is a Counter Offer in Contract Law? Explained Simply and Clearly
- Understanding the Costs: How Much Do Injunctions Cost in the UK?