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Law professor evaluates Elon Musk’s arguments against Twitter

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Columbia Law School Professor Zohar Goshen joins Yahoo Finance Live to discuss the claims Tesla CEO Elon Musk has levied against Twitter and whether the social media platform has recourse after Musk backed out of the buyout deal.

Video Transcript


- Well, Elon Musk taking to Twitter this morning to go after the social media company after backing out of his proposed $44 billion acquisition of the platform. Can we read what it says? Essentially says they said I couldn't buy Twitter, then they said I wouldn't disclose the bot info, then they said they wouldn't disclose the bot info. It's kind of small there, but Elon Musk tipping his hand there to say, well, maybe now the company is going to have to disclose its information in court now that Twitter says it will, in fact, sue the Tesla CEO.

How much of this argument holds up in court, though? Joining us to weigh in is Columbia Law School's transactional law professor Zohar Goshen. Zohar, I imagine you've been getting a lot of calls this weekend. Suddenly everybody is an expert on material adverse effects. Elon Musk says there's a material breach that happened. Twitter says we're going to take you to court to force you to buy the company. Who's on more legal or more sound legal footing?

ZOHAR GOSHEN: So I want to explain that the materiality story is only relevant to one of the arguments that they are making. So they have three arguments. One of the arguments is about the representation that they have about 5% of the monetized accounts being fake. This part is subject to the material adverse effect clause, which suggests that even is this information is accurate, then it must have some substantial effect on the proposed, meaning declining value, I would say, 40%, 50%, something really dramatic.

I don't think anyone believed that in this case, this is the level of inaccuracy that is in place with regard to these bots, especially when you see that in the letter, they don't bring any information. They basically say, my client believes that the number is higher. That's all. So I don't think that this part is the strong claim that they have.

They have two other claims, which are based on provenance, which are not subject to material adverse effect. One is that we asked for the information. We didn't get it. And the other is there is a commitment to keep the company in the normal course of business. And you fired two executives and third of the talent acquisition group. These are more, these arguments make more sense than the argument about the 5% of the bots.

- So let me follow up on that point, though, because some would argue, look, Elon Musk waived his right for due diligence when he went ahead and acquired the company or actually said that he just going to go ahead and move forward with the company. That 5% number is no secret. I mean, Twitter has been disclosing this in their filings. They have consistently come out and said that.

So to what extent does Twitter need to hand over additional information? I mean, what is the bar for that? If Twitter says, we've given you all the information, you're just fishing for more?

ZOHAR GOSHEN: So they gave the information. And they have the commitment to give the information. But the commitment to give the information is qualified for anything that is reasonably required to close the deal. And there is a basis to claim that in this case, the information is being requested in order to walk out of the deal. So I think they would-- if this is the case, they have a very strong claim against that.

Second thing is they have a qualification that they are not supposed to give information if the information is going to harm the competitive position of Twitter. And in this case, it seems that Mr. Musk is representing or creating the suspicion that there might be a major fraud conducted by Twitter on its clients. And that might go against the requirement that the information is not supposed to hurt and harm Twitter. So in that regard, I think that the information request is not a strong argument on the part of Musk. But the normal course of business might be an issue, but I don't think sufficiently big enough to allow them to walk out of the deal.

- There's another issue that Musk's lawyers have raised, which is the two executives that have left the company, that were fired by the company, they've also talked about the hiring freeze that was implemented and how Elon Musk wasn't specifically consulted on that. How sound is that argument?

ZOHAR GOSHEN: This is a sound argument. This is a sound argument, because there is a commitment to keep the company in normal course. And making changes, even in the time of downturn of the economy, this has now become a judgment for whether this is a normal course of business to adjust the business, given the change in the economy. Or should we say no, no, you should keep the company as it is, regardless of the changes in the economy?

And if you want to make any changes, let me know about it in advance. And you didn't do it. And then that might create an issue. So from my perspective, this is the part which might give some leverage in the negotiation for Musk's side regarding any settlement that might take place.

- There is an argument to be made here that potentially Elon Musk is just trying to drive down the price of the deal, given where Twitter's stock have fallen. He's got financial backers behind this $44 billion deal, although a big chunk of it is the money that he will put up. Can Elon Musk just say, look, those backers aren't coming with me? I mean, at that point, what happens? Is that a valid argument to bring up in court?

ZOHAR GOSHEN: So the way I understand the letters that the lenders provided to Twitter based on arranging the financing, they don't really have any way out. Obviously, they would like to help Musk. Musk is their client. And, obviously, they would like to get out regardless of Musk, because the credit conditions now are completely different than what we have a few months ago. But the way I read the letter, I don't read the letter that they provided has given them any way out with regard to the financing.

I see the main issue is that even if Twitter wins in terms of the arguments and should get the specific performance against Musk, I see enforcement becoming a major, major issue. We don't have any precedent in which a court ordered someone to close such a big deal, $44 billion. And no one knows what will happen if Musk just said, you know what? Regardless of that, I'm not closing.

- So either way, this just points to a prolonged legal battle. We will all be watching. Columbia Law professor Zohar Goshen, appreciate you joining us today.