Elon Musk on Friday declared Twitter had breached multiple provisions of the acquisition deal, and he was therefore left with no option but to terminate the deal. Twitter vowed legal action to force Musk to follow through on the deal.

Twitter’s chairman, Bret Taylor tweeted out, “The Twitter Board is committed to closing the transaction on the price and terms agreed upon with Mr. Musk…”

Musk’s legal team asserted in a filing that Twitter had refused multiple requests by Musk’s team for more information regarding fake or bot accounts on the platform, which were crucial to accurately value the company’s worth.

The filing said, “Twitter is in material breach of multiple provisions of that Agreement, appears to have made false and misleading representations upon which Mr. Musk relied when entering into the Merger Agreement.”

Musk also noted Twitter had fired one third of the talent acquisition team, as well as several high-ranking executives, which violated Twitter’s contractual obligation to, “preserve substantially intact the material components of its current business organization.”

The acquisition deal will now most likely enter into protracted legal-action phase which may take some time to unfold, and which could introduce previously confidential pieces of data about the company into the public domain.

However this also does not mean the deal is finished. More often than not, disputed acquisition deals that head to the Delaware court system end in renegotiated deals, or settlement deals involving payoffs to allow a party to walk away. Following the Covid pandemic, numerous acquisition deals that had faltered in the face of the economic shock of global lockdowns, entered into renegotiation, producing new deals under new terms.

When LVMH sought to acquire jeweler Tiffany & Co., at one point LVMH threatened to walk away, at which point Tiffany lowered the acquisition price $425 million to $15.8 billion.

Only more rarely will a judge order a deal to go through. Most times both parties are motivated to move on, and thus will be motivated to work out a mutually beneficial deal.

According to one source familiar with Twitter’s thinking however, Twitter is hoping that court action will commence in a few weeks, and a decision will be reached in a few months. For its part, Twitter appears confident in its case, and some legal experts agree.

Ann Lipton, associate dean for faculty research at Tulane Law School said, “I’d say Twitter is well-positioned legally to argue that it provided him with all the necessary information and this is a pretext to looking for any excuse to get out of the deal.” 

Twitter shares fell 6% to $34.58 in extended trading, making the stock worth 36% less than the price Musk had originally agreed to pay in April, which was $54.20 per share.

Although Twitter initially surged after Musk bought a stake, it rapidly began to fall after he announced his takeover plans, as investors assumed that he was probably going to back out of the deal. Twitter is now trading at the lowest price it has seen going back to March.

The contract for the acquisition will require Musk to pay a break-up fee if the deal were to fall through due to factors like financing failing to come through, or regulators blocking the deal. The break-up fee would not apply however, if Musk ends the deal because Twitter failed to fulfill its own contractual obligations.

Social media stocks have been battered since worries about inflation began to turn to concerns about a potential recession, which could strip such companies of the advertising revenues they need to be profitable. Twitter had largely weathered the storm when investors initially thought Elon Musk had bought a stake in the company because he believed in it. When he announced a takeover offer that depended on Twitter having a limited number of bots and spam accounts, investors judged it likely to not go through, viewed Musk’s involvement with the company in more temporary terms, and the stock began to slide, albeit not as badly as others.

Shares of online companies dependent on advertising, such as Alphabet, Meta Platforms, Snap, and Pinterest have declined about 45% on average in 2022. Twitter had declined just 15% based on the possibility of the acquisition by Musk.

Now with his abandonment of the deal as well as a protracted legal battle in the offing, the pall of uncertainty cast over the stock will mix with a perception many of its users may be fake. The stock is likely to face harsh investor scrutiny going forward.

Daniel Ives, an analyst at Wedbush, said, “This is a disaster scenario for Twitter and its Board as now the company will battle Musk in an elongated court battle to recoup the deal and/or the breakup fee of $1 billion at a minimum.”