Elon Musk's Bid to Acquire Twitter May Face New Legal Challenges

With Elon Musk's Twitter takeover drama winding down, the proceedings still aren't looking good even when it's now in its fifth week of the process.

This week, as Musk insists that his $44 billion acquisition offer is 'on hold' due to doubts about the truth of Twitter's assertion that 5% of its active users are bogus, Twitter is embroiled in its own drama, which is linked to the acquisition attempt.

After losing several top executives, whether directly or indirectly, as a result of the impending change in ownership (including former CEO Jack Dorsey's complete exit), Twitter is now fighting over board members, with Silver Lake Partners' Egon Durban resigning after Twitter shareholders obstructed his re-election.

With Elliott Management Group's move to buy up Twitter shares and drive Jack Dorsey out of his role as CEO, Durban was appointed to the Twitter board of directors in 2020. Elliott believed Dorsey was underperforming, so it teamed up with Silver Lake to urge the company to either raise its bottom line or adopt a change of management.

As a result, Twitter implemented new revenue and growth targets, which it recently confessed are falling short of.

Durban has been a longtime ally of Elon Musk, and Twitter shareholders voted earlier this week to prevent Durban from being re-appointed, in what may seem like some sort of protest from Twitter shareholders.

Even so, Durban's resignation was still rejected by Twitter.

Durban's board re-election was likely denied by shareholders, according to Twitter, because he also serves on the boards of six other publicly traded companies. Durban has promised to move away from these other responsibilities, which Twitter claims is enough to keep him on board.

According to Twitter:

“While the Board does not believe that Mr. Durban’s other public company directorships will become an impediment if such engagements were to continue, Mr. Durban’s commitment to reduce his board service commitment to five public company boards by the Remediation Date appropriately addresses the concerns raised by stockholders with regard to such engagements. Accordingly, the Board has reached the determination that accepting Mr. Durban’s Tendered Resignation at this time is not in the best interests of the Company.”

Why is Twitter keeping Durban on? It's difficult to say, especially because Musk has stated that if/when he owns Twitter, he intends to remove the board of directors.

Representatives from key investors, on the other hand, may help Twitter preserve some stability if the sale falls through.

Another important reason to keep the link between Twitter's board of directors and Musk may exist.

On another front, Twitter shareholders are considering filing a class-action lawsuit against Elon Musk for his Twitter takeover bid, claiming that Musk's Twitter acquisition speech 'violated California corporate laws on several fronts,' thus engaging in market manipulation.

According to CNBC:

“In one potential violation, they claim that Musk financially benefited by delaying required disclosures about his stake in Twitter and by temporarily concealing his plan in early April to become a board member at the social network. Musk also snapped up shares in Twitter, the complaint says, while he knew insider information about the company based on private conversations with board members and executives, including former CEO Jack Dorsey, a longtime friend of Musk’s, and Silver Lake co-CEO Egon Durban, a Twitter board member whose firm had previously invested in SolarCity before Tesla acquired it.”

Perhaps this is why Twitter chooses to keep Durban in-house because of his past connections with Musk, which could help the purchase go through, or benefit shareholders with their class action.

Although Durban's current involvement is unlikely to confer any further legal heft in this regard, there may be some connection between these two components of the increasingly tangled Twitter acquisition.

Indeed, there is still a chance that the Musk takeover will not take place.

Musk has stated frequently and publicly that he will not purchase Twitter until it can assure him that its data on bogus profiles are exact - although Twitter claims that the deal is not 'on hold' and that it is preparing for the final transaction to be completed.

The SEC is currently examining Musk's activities in the run-up to his Twitter takeover bid, so there could be more issues. Add in his numerous public comments and disclosures that verge on market manipulation (as per the proposed shareholder action), and Musk's Twitter transaction could reach a point where regulators just veto the process owing to his behavior.

Is this Musk's strategy? Various analysts have speculated that Musk is searching for a way out of the deal, and while the general consensus is that Musk will be compelled to pay up and acquire ownership of the app at some point, there are still certain legal loopholes that he may exploit to stop the deal.

This would be catastrophic for Twitter.

Though investors are angry with Musk right now, particularly after his multiple comments and criticisms caused the stock to plummet, Musk's departure would leave Twitter in a much worse situation, with many product leaders gone and a decreasing share price that would be tough to reverse, given Musk's numerous questions about the company's processes.

Is it possible for Twitter to get back on its feet and grow if Musk abandons his acquisition bid?

Essentially, Musk's departure would be a massive, public declaration that Twitter isn't a viable investment, and when the media frenzy fades, interest in the service might dwindle even further, stifling growth for years to come.

Perhaps that is Musk's true motivation here: to cause so much damage to the company that it is forced to accept a reduced offer price, saving Elon millions in his takeover bid.

In any case, things aren't looking great right now, and there are a lot of moving elements that must keep Twitter CEO Parag Agrawal up all night.

The Elon period appears to be on the horizon, but as to when it'll arrive is still unknown.