Elon Musk’s $44 billion buyout of Twitter is facing its first legal challenge. A Florida pension fund is suing Musk and Twitter, arguing that the deal can’t legally close until 2025 due to the billionaire’s stake in the platform. The proposed class-action lawsuit — filed today by the Orlando Police Pension Fund in the Delaware Chancery court— also declares that Twitter’s board of directors breached its fiduciary duties by allowing the deal to go through. In addition to Musk and Twitter, the lawsuit also named former Twitter CEO Jack Dorsey, current Twitter CEO Parag Agrawal and the company’s board as defendants.
In a message to Engadget, Tulane Law School’s Professor Ann M. Lipton says the lawsuit raises “some very novel issues” under Delaware corporate law. Under a law known as Section 203, shareholders who own more than 15 percent of the company can’t enter a merger without two-thirds of the remaining shares granting approval. Without this approval, the merger can’t be finalized for another three years.
The fund’s lawyers state that Musk initially owned roughly 10 percent of Twitter’s shares, which would seemingly not make Section 203 applicable. But, the fund argues, Musk formed a pact with Morgan Stanley (which owns 8.8 percent of shares) and former CEO Jack Dorsey (who has 2.4 percent) to advance the deal. The combined stake of these parties allegedly makes Musk and his allies in the takeover deal an “interested shareholder” under Section 203 — which, if the court agrees with the underlying reasoning presented in the case, means the merger must either be delayed or get approval shareholders representing at least two-thirds of the company’s ownership.
“Section 203 is not often litigated, and so the issue of whether Musk’s relationship with these parties actually counts for statutory purposes is an unsettled question and it will be interesting to watch how it unfolds,” wrote Lipton.
More details of Musk’s highly complex $44 billion buyout of Twitter have been made public since the social media platform accepted the billionaire’s offer last month. The New York Times reported that Musk promised investors returns of nearly five to ten times their investments if the deal went through. Parts of the deal are being scrutinized, including its reliance on foreign investors and whether Musk bought shares in the company specifically to influence its leadership. But antitrust experts say the merger is unlikely to be blocked by the FTC. The agency will decide in the next month whether to quickly approve the merger or launch a lengthier investigation.