Elon Musk may feel impervious to public scrutiny, regulation, and litigation, but the biggest threat to his wealth is a deal he signed in April to purchase Twitter for $44 billion—a deal he is desperately trying to weasel out of. Musk and Twitter are embroiled in a Delaware court, set for an October trial, that will determine whether or not he needs to spend money he promised to close the deal.
With critics, litigants, and regulators circling Musk, Quartz asked experts who Musk should fear most.
Kathaleen McCormick is the chancellor of the Delaware Chancery Court hearing his case with Twitter. McCormick can spoil Musk’s plans by ruling in favor of Twitter and force Musk to complete the deal, rather than merely pay damages. (Musk signed a “specific performance” clause in the takeover agreement, but is arguing that Twitter hasn’t shared the requisite information necessary to close the deal.)
“She’s very experienced, very straightforward, she’s not afraid to issue orders that she thinks are appropriate, and she’s got enough experience to understand how deals are normally conducted and how parties understand various terms in merger agreements (like information rights),” said Tulane University securities law professor Ann Lipton. “I don’t think she’ll be thrown off track by attempts at distraction or muddying the issues, which—so far, with all caveats about new information coming out—seem to be Musk’s only hope.”
Wedbush Securities senior analyst Daniel Ives agreed. He says Twitter appears to have the upper hand in court. This leverage “could cost Musk dearly in a major settlement of $5 billion-plus or forcing him to go through with the Twitter deal,” Ives said.
Musk should be concerned about the US Securities and Exchange Commission (SEC), said David Lurie, a securities litigator in New York. The SEC has sued, fined, and criticized him for his public antics related to Tesla. The regulator sued Musk in 2018 after he tweeted a lie that he had secured funding to take Tesla private at $420 per share. Musk settled with the Commission, stepped down as chairman, and agreed to let a lawyer supervise all of his Tesla-related tweets (something he has since unsuccessfully fought to remove in court). “I want to be clear,” Musk told CBS News in 2018. “I do not respect the SEC. I do not respect them.” The SEC is investigating whether Musk and his brother Kimbal violated insider trading rules in trading Tesla stock, and it’s investigating whether Musk broke the law by waiting more than two weeks before reporting that he had bought up more than a 5% of Twitter stock.
“The Commission could potentially seek to bar Musk—who is already subject to the terms of an SEC settlement—from serving as an officer of a public company, like Tesla if it finds that he has engaged in further, serious, misconduct,” Lurie said.
On July 29, a Twitter shareholder named Luigi Crispo sued Musk for breaching his contract with Twitter and his fiduciary duty to Twitter shareholders. The lawsuit alleges that Musk used “lame rationales for reneging on his contract” and asks the court to force him to close the deal.
If this lawsuit, filed in Delaware, obtains the class-action status it seeks, it would be a “game changer,” according to Angelo Carusone, the president and CEO of the left-leaning advocacy group Media Matters for America. It could spell serious trouble for Musk outside of the bounds of his ongoing lawsuit with Twitter over the terms of the deal.
“If it gets class action, you’re going to see all these different people coming out of the woodwork and that’s where it really changes,” Carusone said in an interview. “There’s no shortage of major players that can speak to the harms this has caused them.”
If Musk loses in court, it could hurt Tesla too. Adam Pritchard, a securities law professor at the University of Michigan Law School, said that Musk should fear Tesla shareholders the most. “If court forces him to go through with the Twitter acquisition, Musk will almost certainly need to rely on his Tesla shareholdings as collateral for at least a portion of the acquisition price,” Pritchard said. “If the Tesla shareholders lose their faith—perhaps worried that the distraction will cause Musk to take his eye off the ball—a steep drop in the share price of Tesla could put Musk in a very tight spot.”
Greg Martin, managing director of Rainmaker Securities, a brokerage that lets clients invest in pre-IPO companies, said in an interview that Musk’s reputation is his biggest money-maker.
“There’s always been a halo effect around Elon Musk and the companies he runs,” Martin said. “Tesla is overvalued by practically any metric except that Elon Musk is the CEO. SpaceX is probably the same.” Martin said he expects that if Musk loses in court that it’ll hurt Tesla’s stock price. But Martin noted that Tesla’s windfall from passage of a proposed electric vehicle tax credit in the US might be so great that it offsets any price drops..
Still, Martin said, “I think he always has to worry about losing the Elon Musk halo effect premium.”
Musk probably doesn’t like losing money, or being sued, or being investigated, or being forced to complete a deal he regrets. But Jennifer Grygiel, an associate professor of communications at Syracuse University who researches social media and has worked in finance, doesn’t think Musk is afraid of anyone or anything. “Worst case, he loses some money and a rung on the Forbes list,” Grygiel wrote in an email referring to a ranking of the world’s wealthiest people. “If he negotiates and gets a better rate, or even if he overpays, he still ends up with a powerful platform. If he gets out of the deal and saves money he’s still more powerful. It’s win-win when you’re that rich.”
Grygiel isn’t a fan of Musk and thinks it’s bad for a platform as important as Twitter to be owned by one single person.
“Elon is going to be fine,” they added. “It’s the rest of us that need to be worried.”