Elon Musk recently acquired social media giant Twitter for a sum of around $44 billion (£36.6 billion). The deal’s conclusion followed months of drama and legal issues as Musk changed his mind about purchasing the company before ultimately following through on the deal.
But why was there so much drama in the first place? Liz Wilkinson, Partner and Head of our Dispute Resolution team, dives into the case, exploring where the complications stemmed from.
Elon Musk v Twitter – what lessons can we learn?
Elon Musk recently acquired social media giant Twitter for a sum of around $44 billion (£36.6 billion). The deal’s conclusion followed months of drama and legal issues as Musk changed his mind about purchasing the company before ultimately following through on the deal.
Musk agreed the price to purchase Twitter back in April 2022. The relationship soured when he tried to get out of this agreement, claiming Twitter had failed to provide information about the number of fake spam accounts on the platform which could affect Twitter’s value. He tried to argue Twitter had misrepresented the position to him and that allowed him to back out.
US Judges held Musk to the contract he had signed and did not allow him to wriggle out of it. As we know, Musk did go ahead with the deal and more drama continues to unfold.
Disputes during and especially after mergers and acquisitions are common although they do not always attract worldwide headlines. In Musk’s case, he couldn’t get out of a contract he had already signed but buyers and sellers of a business can find themselves stuck with an agreement before they realise they are.
Heads of Terms
Buyers and sellers of a business often outline terms of the proposed deal in a document known as heads of terms which are usually not supposed to be a fully binding contract. However, if care is not taken, such documents can become legally binding in their own right and parties become fully committed without realising it.
Heads of Terms can be very useful. They can record terms which have been agreed in principle to avoid going over old ground; they can outline the timetable and obligations of the parties during negotiations and can give comfort that final agreement is achievable prior to embarking on the expensive due diligence and drafting stages.
However, if care is not taken and the terms become sufficiently certain, a party who thought they were only talking may soon find themselves committed to selling or paying before they had fully decided.
Here are some tips on avoiding a dispute relating to Heads of Terms:
- Clarity – be exceptionally clear which terms are intended to be binding or not.
- Mark them “Subject to contract/ Subject to Board approval” – this is a starting point to include in drafting; however, its inclusion does not automatically protect the parties. It would be wise to include a more specific statement stating that the Heads of Terms are not intended to be legally binding except as specifically set out.
- Agreement to Agree – generally, an agreement to agree is not enforceable. It would be beneficial to include wording stating that the parties agree to enter into negotiations in good faith and enter into a contract. The Courts are keen to see parties entering into genuine negotiations.
- Negotiations – when drafting Heads of Terms, do not allow negotiations to become a dress rehearsal to the final contract. It is important to draw a clear distinction between Heads of Terms and the final contract.
- Entire agreement clause – including this clause in the final agreement seeks to protect against claims for negligent misstatement and misrepresentation which may have arisen within the negotiation and discussion of Heads of Terms.
- Duration – the expiry of the Heads of Terms can be vital. It is important to discuss what happens once the expiry date occurs. If the parties have not signed a final contract by the expiry date but continue working together, they risk becoming committed by stealth.
For further information on Heads of Terms or for advice on disputes during a business acquisition, you can talk to one of our team at 0161 969 3131 or fill in our contact form.