Elon Musk and Twitter Brace for Legal Fight: All You Need to Know

Tesla CEO Elon Musk and Twitter are bracing for a legal fight after the billionaire said Friday he was abandoning his $44 billion (roughly Rs. 3,37,465 crore) bid for the social media company.

Twitter is vowing to challenge Musk in court to uphold the agreement. Shares of Twitter slid more than 11 percent on Monday. Here's a look at what could happen next.

Why is musk backing out?

There are a lot of reasons why Musk might have had second thoughts. But he alleged Friday that Twitter has failed to provide enough information about the number of fake accounts it has.

Twitter said last month that it was making available to Musk a “firehose” of public raw data on hundreds of millions of daily tweets. But Musk's lawyers have argued that the company was providing Musk with sometimes “incomplete or unusable information” and less data than it offers some of its big customers.

Twitter said last week it uses a mix of public and private data to determine the amount of spam. Private user data isn't available publicly and thus isn't in the data “firehose” that it gave Musk. That would include IP addresses, phone numbers and location. Twitter said such private data helps avoid misidentifying real accounts as spam.

Twitter has said for years in regulatory filings that it believes about 5 percent of the accounts on the platform are fake. But on Monday Musk continued to taunt the company, using Twitter, over what he has described as a lack of data.

What is twitter's response?

Twitter declared its intent to sue Musk. The company could have pushed for a $1 billion (roughly Rs. 162 crore) breakup fee that Musk agreed to pay under these circumstances. Instead, it looks ready to fight to complete the purchase, which the company's board has approved and CEO Parag Agrawal has insisted he wants to consummate.

The chair of Twitter's board, Bret Taylor, tweeted Friday that the board is “committed to closing the transaction on the price and terms agreed upon” with Musk and “plans to pursue legal action to enforce the merger agreement. We are confident we will prevail in the Delaware Court of Chancery.”

The trial court in Delaware frequently handles business disputes among the many corporations, including Twitter, that are incorporated there.

Who's going to win?

It's almost impossible to predict the outcome of any protracted legal battle. But law and business experts believe Twitter likely has the stronger case.

Morningstar analyst Ali Mogharabi noted that Twitter has described its estimate of fake and spam accounts for years in regulatory filings while explicitly noting that the number might not be accurate given the use of data samples and interpretation.

Given current market conditions, Mogharabi said, Twitter may also have a solid argument that the layoffs and firings of the past weeks represent “an ordinary course of business.”

“Many technology firms have begun to control costs by reducing headcount and/or delaying adding employees,” he said. “The resignations of Twitter employees cannot with certainty be attributed to any change in how Twitter has operated since Musk's offer was accepted by the board and shareholders.”

The case could also end in a settlement, for instance with the two sides negotiating a lower price. If Musk wins, there's also the question of the $1 billion breakup fee. He can certainly afford it, but will he want to pay?

What happens to Twitter now?

The Musk saga has been, to put it mildly, a distraction for Twitter's workers, executives and even users. Some employees have quit, while others were laid off or fired. Job offers have been rescinded and discretionary spending curtailed.

“For Twitter this fiasco is a nightmare scenario,” Wedbush analyst Dan Ives, who follows the company, wrote Monday. He said the result would be “an Everest-like uphill climb for Parag & Co.” given concerns over employee morale and retention, advertiser concerns and other challenges.”

Twitter itself is unlikely to go anywhere regardless of whether or not it changes hands. But if the turmoil continues it could scare away advertisers. If too many engineers and other employees leave, the platform's quality could suffer as well.

“The one bright spot is that if (Twitter) is ultimately victorious in the courts, it could potentially take north of the $1 billion in break-up fees that Musk could have to pay,” said CFRA analyst Angelo Zino.

If he loses, will musk comply?

Even if Musk loses the court case, some observers wonder if the world's richest man will abide by the outcome. That's in part based on his antagonistic approach to unfavourable actions from the US Securities and Exchange Commission over Musk's tweets claiming he had the funding to take Tesla private in 2018.

That led to a securities fraud settlement with the SEC requiring that his tweets be approved by a Tesla attorney before being published. But the SEC later investigated whether the Tesla CEO violated the settlement with tweets last November asking Twitter followers if he should sell 10% of his Tesla stock.

Musk had argued that the agency can't take action about his tweets without court authorization. This time, however, he could very well face an actual court order to pay the $1 billion breakup fee — or to finish the acquisition even if he doesn't want to.