Elon Musk wants to take over Twitter First he buys a large number of shares of the company. Then he submits a takeover offer, which the shareholders are positive about. However, shortly afterwards Elon Musk withdraws his takeover offer. He cites the reason that he was in the doubt about the true number of fake and spam accounts on Twitter. Apparently, there has not been sufficient due diligence prior to the takeover attempt. In response, Twitter sued Elon Musk to implement the acquisition. Elon Musk then filed a counterclaim. In addition, Elon Musk now cites as another argument that Twitter, contrary to previous agreements, should have paid a severance payment in the amount for which his consent would have been required. Finally, the security of user accounts has also been added as an issue. We can already make some observations on this case that shed light on the possible outcome of this dispute.

Elon Musk and his plan to acquire Twitter

SEGMENT002 1.1. The Eccentric Elon Musk

Anyone who suspects that Elon Musk uses a certain eccentricity merely as a well-groomed image for marketing purposes may ponder if you use the names of his children as an indication: X Æ A-XII or Exa Dark Sideræl, for example. What is certain is that Elon Musk is distinguished by the fact that he knows how to implement ideas that initially seem outlandish. After all, success with the development, production and distribution of pure electric cars or launch vehicles also seemed to rule out many visionary analysts. And yet he did just that. Tesla has long been the only source of electric cars in the mass automotive market. And SpaceX could just as well refuel the rockets it designed with a highly reactive mixture of ambition and bombast – they would take off anyway. Realistically, however, one must always exercise caution when evaluating announcements or projects of the multibillionaire already in development.

1.2. The fickle Elon Musk and the planned acquisition of Twitter

Also to be treated with caution are public statements by Elon Musk. Quite often, a certain erroneousness shines out, which, as we know, is quite characteristic of eccentrics. Due to this, however, another feature that can be observed with Elon Musk, namely a tendency to fluctuate in his opinions. An example of this may be the announcement that Tesla intends to sell its holdings of Bitcoins. The announcement by Elon Musk that Tesla also accepts Bitcoin as a means of payment – actually as a medium of exchange – when buying their cars goes in the same direction. But a few weeks later, the retreat also follows here. Due to the currently sobering environmental balance of cryptocurrencies, Elon Musk did not want to accept Bitcoins as a means of payment.

The most recent example in this series is the planned takeover of Twitter by Elon Musk. For 44 billion dollars, he had made an offer through which he wanted to acquire shares in this company. So Elon Musk was keen to buy more than just the majority of Twitter shares – he wanted them all. This would have allowed him to take Twitter stock off the stock market and basically manage the company like a sole proprietorship. The advantage he might have hoped for was that in this way he would have had complete freedom of action in his entrepreneurial decisions. But shortly thereafter, he withdrew, via Twitter, his purchase offer. So we wonder if this is so easily possible.

Elon Musk and the ruptured takeover of Twitter – legal bases

2.1. The starting point for our considerations are the regulations in Germany

So let’s consider whether it’s easy to take back such an offer in the stock market and how Elon Musk is now trying to do just that in terms of taking over Twitter.

First of all, we would like to point out in our article that with regard to these considerations, we primarily assume the legal situation in Germany. In particular, the Securities Acquisition and Takeover Act (WpÜG) and the Stock Exchange Act (BörsG) are relevant here. So we want to pretend that Twitter is a public company listed on the stock exchange in Germany. This enables us to present the relevant legal situation for our readership in Germany. Incidentally, however, it should also be mentioned that the legal situation in the USA hardly differs significantly from that of Germany in this respect.

2.2. What is a Delisting Acquisition Offer?

German law basically has three different variants with which shareholders can publicly submit offers to acquire further shares. The variant with which Elon Musk wanted to carry out the takeover of Twitter is called delisting acquisition offer (also known as buy-out). The objective of such a delisting offer is to acquire a sufficient number of shares so that the acquiring bidder receives the necessary voting rights to take the target company off the stock exchange (the so-called delisting). For this purpose, the tenderer submits his offer via tender documents that comply with the provisions of the WpÜG. Among other things, the offer must correspond at least to the weighted average market price of the previous six months. By the way, in addition to cash payments, the exchange with the bidder's own shares in return is also permitted. However, it is essential that the offer should not contain any separate conditions.

History of Elon Musk’s Offer to Acquire Twitter

Let’s now briefly look at the past events that led to Elon Musk’s offer to take over Twitter and how they developed in the aftermath.

3.1. Takeover of Twitter by Elon Musk: first act

For some time now, Elon Musk has been active and quite communicative on Twitter. One can therefore assume that he appreciates this form of communication. Therefore, it is also understandable that he has made his own efforts to establish his own communication platform as a competitor to Twitter. However, this has so far been without concrete results.

But it is also remarkable that Elon Musk is always irritated with his comments on Twitter. As Twitter moved more and more to sanction inaccurate contributions in general, which in particular brought Donald Trump a ban from the platform, Elon Musk was critical of these measures. He described this as a restriction on freedom of expression, but without mentioning the obligation of all users to comply with the guidelines on Twitter.

3.2 Acquisition of Twitter by Elon Musk: second act

In April 2022, Elon Musk acquired a large number of shares of Twitter via stock exchange acquisitions. His shareholding matched about 9.2% of all Twitter shares. He became the largest shareholder of Twitter. However, in order to be able to influence the management of Twitter to the extent he apparently wanted, Elon Musk needed significantly more shares. That is why Elon Musk submitted a takeover offer to the relevant stock exchange supervisory authority in mid-April. He offered to buy up Twitter shares at a value of $54.20 each. Shortly before, the stock market value of Twitter stock was still about USD 46.00.

The other Twitter shareholders and the company itself had to react to this takeover offer. This required the approval of management on the one hand, but also that of shareholders on the other. Ultimately, there was an agreement with Elon Musk.

But already at that time there were indications that the takeover attempt could be hurdle-rich. For example, Elon Musk’s criticism of the restriction of freedom of expression on Twitter was one of the indications that could have prevented the company from approving the takeover. Another indication was Elon Musk’s announcement that Twitter contains a large number of fake and spam accounts. This number should make the company public in the course of the acquisition, Musk said.

3.3 Takeover of Twitter by Elon Musk: third act

On 09.07.2022 there was an open break between Elon Musk and Twitter. Elon Musk announced that he is withdrawing from his offer to buy Twitter shares. To justify this, he cited his criticism of the allegedly high number of fake and spam accounts on Twitter. Twitter then filed a lawsuit. Finally, the payment of a fine of USD 1,000,000,000 had been agreed upon in the event of the withdrawal of one of the parties. And from the point of view of Twitter, Elon Musk has taken this step with his resignation from the purchase offer.

For his part, Elon Musk responded by filing a counterclaim. However, this action was received by the competent court as confidential. Therefore, the details of this complaint are still unknown to the public. At least we know that the competent judge has set the date of the hearing on 17.10.2022 and plans for five days of the hearing.

Meanwhile, Elon Musk leads another reason to withdraw from his offer. He argues that contrary to previous agreements, Twitter should have paid a severance payment to a whistleblower without prior consultation with Musk.

Nevertheless, a majority of shareholders have now spoken out in favor of a sale of Twitter to Elon Musk. A continuation of the takeover should therefore at least be possible from this side. However, Elon Musk was also able to extend his point of view by another aspect. The whistleblower, who was previously head of security at Twitter, had reported significant security shortcomings. The competent judge, who will decide on the complaints in October, already allowed these other aspects at the trial.

4th Elon Musk vs. Twitter: legal assessment of the dispute

We can now try to assess the legal situation. It is clear that both parties take opposing positions. Elon Musk has resigned because Twitter did not provide sufficient information about the number of fake and spam accounts. This should have been discussed in a due diligence examination. But what also failed is the due diligence exam itself. At least the scope has been greatly shortened on Elon Musks operated, so that this examination can be described as inadequate.

In the run-up to a corporate transaction, especially in one of this dimension, an extensive due diligence is required, because in the Anglo-Saxon jurisdiction the buyer assumes the duty of care for the consequences of a transaction. He stands for the fact that the takeover of a company carries as few risks as possible, otherwise only manageable risks. By this omission, Elon Musk is, in our opinion, the circumstance attributable to the fact that the takeover offer was still valid when he terminated it.

Although the importance of due diligence lies in particular in the protection of shareholders, so that they do not suffer a loss in the value of their shares. However, it should be remembered that when Elon Musk acquires Twitter at the end of the process, there are no other shareholders who could make a potential claim for damages. In this respect, the abbreviation of the due diligence exam from the Persepctive Elon Musks is quite understandable. Whether this still makes sense, we leave open rhetorically.

To what extent the recent charges raised by Elon Musk to prevent the takeover of Twitter reinforce his legal position, we can hardly assess at this time. One could argue that checking the security measures to protect Twitter user accounts is also part of the scope of due diligence. That these details could now be relevant after Musk’s withdrawal from the purchase offer, but is apparently also conceivable.

5th episode of the ruptured takeover of Twitter by Elon Musk

If there is indeed no reason to follow the view of Elon Musk and his lawyers, the court ruling on this matter should be clear. Because then Elon Musk would have to meet the purchase offer on the one hand, and on the other hand pay the conventional penalty of USD 1,000,000,000.

So if the court were to force the takeover offer to be fulfilled, it remains questionable whether Elon Musk will actually manage to achieve the targeted participation rate on Twitter. At least it looks like this at the moment. Should Elon Musk really acquire the necessary number of Twitter shares, he could squeeze out the remaining shareholders from the company. In the end, he would gain complete control over Twitter. In this case, he is likely to actually remove the stock from the stock market via a delisting, because this would eliminate the costs and requirements of a listing. For him, however, it is more important that he can exercise full control over the short message service, as he probably originally intended.

On the other hand, although this seems unlikely at the moment, Elon Musk could win in court. In this case, Twitter would be faced with the damage of this dispute. In particular, the share price of Twitter has eased since the dispute. But the reputation of the short message service has also suffered. While it seems unlikely that this will harm Twitter in the long term, investor confidence in the company is already significantly lower than before the takeover offer by Elon Musk. But this could also be an opportunity for renewal for Twitter.

So we can look forward to the future.