Last month, Elon Musk’s fellow panelists on CNBC were astonished when David Faber said that the eccentric billionaire could face jail time in his upcoming legal dispute with Twitter over their rebuffed $44 billion takeover agreement.
“The way Musk played twitter was not …great. Good thing he is going to jail.” – Some Twitter Shareholders say.
Many investors and analysts who own Twitter shares have been wondering whether Musk would actually be sentenced to jail. Furthermore, the question is not as absurd as many analysts seem to believe.
So, this is what happened. Billionaire businessman Elon Musk made a $43 billion offer to acquire Twitter, Inc., an American social media company, on April 14, 2022. For your information, he had already paid $2.64 billion for 9.1% of the company’s stock, making him its largest shareholder.
On May 13, Musk tweeted that his team would test 100 random Twitter accounts in an effort to disprove Twitter’s claim that the number of spam/bot accounts on its platform was less than 5%. He also invited “others to repeat the same process and see what they discover.”
And this is how the drama all originated. After a few weeks, Musk announced in a series of tweets that the contract was being terminated. On July 8, he announced he was “terminating” their contract due to claims the company misled him about the number of fake and spam accounts it had tallied.
As soon as Elon Musk announced that he was canceling his $44 billion agreement to acquire the business on July 12, Twitter immediately filed a lawsuit against him in the Delaware Court of Chancery.
Musk really doesn’t shrink from a fight.
Elon Musk filed a confidential countersuit against Twitter Inc. (TWTR.N) on July 29, intensifying his legal battle with the social media company over his attempt to back out of the $44 billion acquisition, hours after Delaware Court of Chancery Chancellor Kathaleen McCormick ordered a five-day trial to begin on October 17.
Musk was also sued on the same day by Twitter shareholder Luigi Crispo, who owns 5,500 shares of the company. Crispo claimed that the billionaire had violated his fiduciary obligation to Twitter shareholders and sought the court to order him to complete the transaction and award damages for the losses he caused.
According to recently made public legal docs from Musk’s attorneys in a countersuit against Twitter, the social media giant attempted to “mislead investors” by reporting misleading financial information to the Securities and Exchange Commission. Musk charges that Twitter’s platform has fewer “monetizable daily active users” and at least twice as many bots than the company claims in SEC filings.
The “monetizable daily active users,” or mDAU, of Twitter, are not as closely tied to revenue as Twitter leads the public to believe,” according to Musk’s attorneys in their countersuit. They allege that Twitter does not clearly explain to Musk or shareholders how they derive the key metric of mDAU. Musk’s allegations about misleading mDAU statistics “are a newly invented litigating position, Twitter’s lawyers wrote.
Twitter responded that the billionaire CEO of Tesla and SpaceX is making incorrect assumptions, and looking for an excuse to back out of his $44 billion agreement in April to buy the social network.
The Tesla Inc. CEO openly mocked the attorney questioning him in Delaware Chancery Court last summer during the SolarCity trial. He said he had “great respect for the court” but not for the attorney, calling him a “bad human being.”
Legal experts say if Musk were to withdraw from a bid just on the premise that he felt he overpaid, the court might order the billionaire to pay Twitter billions of dollars in damages in addition to the $1 billion breakup fee. For instance, Tiffany filed a lawsuit against French luxury goods behemoth LVMH in 2020 after it attempted to back out of a contract.
San Francisco-based Twitter’s attorneys claim in their lawsuit that they will only need four days in court to show that Musk must uphold his end of the deal and pay $54.20 per share for the social media company.
According to Charles Elson, a retired University of Delaware finance professor and the former director of the university’s Weinberg Center for Corporate Governance, any court judgment Musk refused to pay would become similar to any other debt. But he highlighted that it might be difficult and time-consuming to acquire Tesla shares in order to pay the debt.
“You’d need to undertake the effort to pierce the corporate veil” over the deal because Musk established holding companies for the purpose of the acquisition, Elson said.
Stating that there’s no such thing as a contract prison, Elson then added, “In a contract dispute, they can’t hold a gun to your head.”
Brian Quinn, a Boston College law professor who teaches about mergers-and-acquisitions law, said that if they prevail and the court enters a judgment holding Musk liable, it could invoke Delaware’s civil contempt laws if he didn’t pay up.
Saying that a judge could hold him in contempt and set a daily fine until he complies, Quinn further added, “For Musk, that would have to be a rather large number.”
A judge has the authority to imprison a scofflaw while they consider their actions under Delaware’s civil contempt law. A defendant who disobeyed a court order to turn in his passport was given an arrest warrant in 2014 by the court. However, a Chancery judge rarely summons the sheriff.
A group of global lawyers insists that Twitter might sue Musk in addition to paying the $1 billion fee if Musk were to abandon a bid because he believed he overpaid. For instance, Tiffany filed a lawsuit against French luxury goods behemoth LVMH in 2020 after it tried to back out of a contract. When Tiffany finally agreed to reduce its sale price from $16.2 billion to around $15.8 billion, the lawsuit was successfully settled.
Imprisonment would be a “last resort,” according to Robert Miller, a law professor with substantial experience in mergers and acquisitions and associated legislation in Delaware Chancery Court.
According to Miller, the Delaware Chancery Court is “expressly authorized” to imprison someone for breaking an order rather than “hold someone in contempt for doing so.”
If you have obtained an enforceable court order and there is a clear breach of the court order, the breaching party may be committing a criminal offense (sometimes known as being in “contempt of court”). This may lead to police action, prosecution, fines, or imprisonment.
A court of the United States shall have the power to punish by fine or imprisonment, or both, at its discretion, such contempt of its authority, and none other, as—
(1)Misbehavior of any person in its presence or so near thereto as to obstruct the administration of justice;
(2)Misbehavior of any of its officers in their official transactions;
(3)Disobedience or resistance to its lawful writ, process, order, rule, decree, or command
Therefore, even if the judge might not begin by sending Musk to jail, it is a possibility that he disobeys the order frequently.