How The Sexual Misconduct Allegations Against Elon Musk Could Affect His Twitter Deal - Social Media Explorer
How The Sexual Misconduct Allegations Against Elon Musk Could Affect His Twitter Deal
How The Sexual Misconduct Allegations Against Elon Musk Could Affect His Twitter Deal

h, here you were thinking that Elon Musk’s—baffling, quixotic—crusade against spam bots was the most important thing we’d need to discuss in Musk-Twitter-dom this week.

Well, it’s not, and that comes from the fresh amount of uncertainty injected into Elon Musk’s will-he-won’t-he buyout of Twitter on Thursday evening when Insider detailed sexual misconduct allegations against him. SpaceX’s former flight attendant was allegedly $250,000 paid by Musk to make her quiet after she saw his naked penis and asked for progeny. Musk told Insider there’s “a lot more to this story” without going into further detail and has sought to characterize the reporting as a politically motivated attack on him, sparked by his outspoken desire to roll back moderation policies at Twitter if he actually does buy the company.

Is there any impact on his Twitter Takeover proposal? It probably—probably—won’t. And that, reasonably, is sure to disappoint anyone who doesn’t buy Musk’s political-smear-job defense and falls into the camp that believes CEOs shouldn’t go around showing off their schmeckles to their employees. But, but! There are a couple longshot possibilities, with emphasis being very much on the word “longshot,” where the allegations may lead.

Twitter’s board might, might These sexual harassment allegations could be used to justify a change in the board’s stance. That could involve the board turning to Section 6.5(d) of the merger agreement, a so-called “intervening event,” which basically means something bad came up unexpectedly after the deal was signed. Or they maybe could use Section 5.1(a), the so-called “Parent Material Adverse Effect” clause, which basically means if the acquirer (Musk in this case) has hidden a fact that would significantly affect the ability to close the deal, the acquiree (Twitter) can walk away.

“Maybe, maybe, maybe the board can change its recommendation,” says Matteo Gatti, a Rutgers University law professor who specializes in corporate litigation. “But that seems like a bit of a stretch.” The board would be in the position of weighing the allegations’ importance “against their fiduciary duties to maximize shareholder value in a sale,” Gatti says. “Since there is no other game in town”—Twitter hasn’t fielded any other offers to buy the company—“they won’t probably do this.” And if the board did, it would need to pay Musk the $1 billion break-up fee detailed in the merger agreement. (A Twitter spokesperson declined to comment about the Insider story on Friday morning and whether it has changed the board’s thinking.)

A shareholder vote will be held on May 25th to decide whether the merger should proceed. Maybe if there’s enough outrage over the allegations, shareholders will reject the deal—even if the board doesn’t change its recommendation. The vote will hinge on the actions of Twitter’s major institutional shareholders and not really you, average Twitter investor at home, at all. And those corporations—Vanguard, State Street, BlackRock to name just Twitter’s largest three such investors—will be asked to do the same mental balancing act as the board: Are these allegations enough to abandon the deal even though we know Twitter probably isn’t going to see another one like it, possibly ever?

They may very well answer that question in the negative, pressing on with the deal, and with that in mind, there’s another element to this discussion worth bringing up now. At this point, Musk has all but confirmed he won’t do the deal at his original $54.20-a-share offer, saying Twitter misled him about the prevalence of spam bots on the platform. Twitter says it didn’t mislead him, and it won’t renegotiate, so it seems like they’re headed for the courts.

Twitter will get a chance to sue Musk by arguing he’s violating the “specific performance” clause in the merger agreement by unjustifiably walking away from the agreed-upon $54.20. A lot will need to go right in Twitter’s favor for that argument based on specific performance to work. Musk must not impede the closing of this deal. The deal will require approval from shareholders. A judge will then be able to comment on the specific performance.

This process will be slow. It will take a lot of time. “The scenario of going through the courts and then going through appeals, you’re talking about a three-to-four-year process,” says Mark Williamson, a corporate and M&A lawyer and partner at Lathrop GRP.

Really, does Twitter have that kind of time to sit in situ, hoping Musk, who doesn’t even seem to want the company anymore, ends up buying the company? Twitter, which was already in trouble before Musk came along, had only seen scattered profits and low revenues over 16 years of existence. (It’s why it can’t find itself another more palatable buyer than Musk to sell itself to.) Moreover, Twitter is a public company, and public company shareholders aren’t typically patient, certainly not “wait for a court to decide a company’s future over years while it risks disintegrating in limbo” patient. Musk, meanwhile, won’t be beset by the same time-crunch demands. You can leave Twitter and walk away completely, or you could walk away with a reduced price. If it drops to $42.69 we may all think about solemnly, but firmly, quitting Twitter.

This is all to say, there’s absolutely no guarantee that suing Musk over specific performance will work. The most likely outcome is that Twitter gives in and Musk receives a lower price. “With this maybe dragging out a long time, I think there’s going to be some back and forth, and in the end, the parties end up coming together in modifying the deal,” says Williamson. And what Twitter’s board and shareholders are left with is this: That they chose to ignore the misconduct allegations in their consideration of selling the company to Musk, and they still didn’t get what they wanted.

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About the Author

Adam is an owner at Nanohydr8. He really loves comedy and satire, and the written word in general.

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