Elon Musk faces a legal nightmare and a potential $1 billion fee as he tries to walk from Twitter deal

• Elon Musk notified regulators Friday that he was calling off his deal to buy Twitter.
• Experts say Musk could face an ugly legal battle and a hefty fine if he indeed walks away.

If Elon Musk follows through on breaking his $44 billion agreement to buy Twitter, he could be setting himself up for a big legal fight — and potentially a $1 billion breakup fee. And Twitter on Friday said it will take him to court to enforce the deal.

Before the late Friday announcement filed with regulators that said Musk would walk away from the deal, experts told Insider that they didn't see many ways Musk could get out of the deal without consequences.

Musk has taken issue with Twitter's assertions that less that 5% of accounts on its service are bots.

Now, after Musk said he'll break the deal, Twitter said in a statement that it would "pursue legal action to enforce the merger agreement."

'A very hard legal claim to win'

Contracts are structured to give sellers certainty, with protections built in to ensure the deal goes through, barring any so-called material adverse effects.

Though Musk has raised concerns that the true number of Twitter bots, Delaware courts have imposed a very high bar for what constitutes a "material adverse effect" that would allow a buyer to exit a deal, said Brian Quinn, associate professor at the Boston College Law School. (Many companies are registered in Delaware because of the state's business-friendly legal system.)

"Generally with these kinds of deals, once you've signed the contract, absent government intervention or an over-bidder, or some material adverse event between signing and closing, these deals will close," Quinn said before the news of Musk trying to cancel the deal, calling a material adverse event a "very hard legal claim to win."

Contracts usually limit what counts as material adverse effects worthy of derailing a deal.

Twitter's lawyers were rigorous in outlining a laundry list events that cannot tank the deal, including market conditions, natural disasters, COVID-19 and any other pandemics, political issues and unrest, among others, according to the merger agreement. Short of hard evidence of something serious, like fraud, for instance, coming to light after the deal was inked, it would be hard to make the case to walk away, Quinn said.

Renegotiating

Twitter may have reasons to be open renegotiating, according to Chester Spatt, a professor of finance at Carnegie Mellon University's Tepper School of Business and a former chief economist at the Securities and Exchange Commission. He commented before the SEC filing from Musk.

"The Twitter folks may think they're going to prevail in court, but they want to resolve the uncertainty," he said. "Or they feel that rather than incurring the costs [of a legal battle] that they maybe concede a little bit to help Musk save face."

Still, some observers are skeptical that a renegotiation is possible. Carl Tobias, Williams Chair in Law at the University of Richmond, told Insider he thinks Twitter will oppose lowering the price given the high value of Musk's initial offer.

Walking away

Then, of course, there was always the chance that Musk walked. Tobias said earlier that Musk might have tried to argue that Twitter hasn't upheld its part of the contract by allegedly misrepresenting how many valid users it has.

McClain took a similar view. "I'm sure he's paying a lot of lawyers a lot of money to figure out a way to circumvent the 'ironclad' document that he signed," he said.

But this move could come with harsh penalties attached, Karen Woody, an associate professor at the Washington and Lee University School of Law who studies securities law, told Insider earlier this year. "The short answer is, he'll be sued," Woody said. "There's a contract here, and it's binding."

Twitter's statement late Friday that it would indeed pursue legal action seemed to make that a certainty.

Twitter could sue him for the $1 billion termination fee set in the terms of the deal, though as Carnegie Mellon's Spatt pointed out, $1 billion is less than 2.5% of the entire value of the deal, and a fraction of a percentage of Musk's fortune.

"If he's only on the hook for the billion, I think it's pretty straightforward: He should walk away," Spatt said. "He should pay the billion and protect his net worth," Spatt said before the SEC announcement.

But Twitter could sue him to force the deal through anyway. In that scenario, Twitter would ask a court to enforce what's known as a "specific performance" clause in deal contracts that requires parties to do what they said they'd do to close the deal. Either way it would result in Musk fighting it out in court.