The disagreement between the tech giant and the social media platform goes to Delaware.

The ever-twisting saga of Elon Musk and Twitter took another turn this week when the Tesla CEO announced his intention to abandon the $44 billion deal to purchase the social media giant, citing bad-faith negotiation tactics and faulty financial information. In turn, Twitter has filed a lawsuit against Musk seeking a completion of the agreement. The Delaware Court of Chancery, located in the state in which Twitter was incorporated in 2007, is set to hear the case. Charles Elson, executive editor-at-large for Directors & Boards, has been in high demand to speak about the dispute, including discussions with CNBC, Bloomberg and The New York Times. He spoke to us about the likelihood of success for Musk in backing out of the deal, potential long-term damage to Twitter and lessons that can be learned by boards.

Directors & Boards: Elon Musk is now attempting to back out of the $44 billion agreement he made to buy Twitter. What are the legal or financial repercussions of trying to back out of such a deal? And what can Twitter do to fight against the deal’s dissolution?

Charles Elson: Twitter has done exactly what they should do. They are taking him to court to specifically enforce the agreement. His argument, by the way, is that there were misrepresentations to him on the true state of affairs at Twitter, and that, had he known what certain financial statistics were, he wouldn’t have done the deal. In other words, there was no deal in the sense that there were problems in the state of the company of which he was not made aware, or certain facts about the company of which he was not made aware. Twitter says he was made aware, and that the issues are not material or important to the consummation of the transaction. He disagrees. What will happen is either he will convince a court that there were misrepresentations, and he will be able to exit without paying damages, or the court will say, “You, in fact, have to conclude that the objections you’ve raised are not enough to kill the deal. You have to proceed with the deal or pay damages,” which in this case would be about $1 billion. You could argue it could be more, but that was the agreement breakup fee, which is basically an indication of what it was worth to Twitter for the deal not to occur. The third scenario would be if he simply renegotiated a lower price with Twitter. Those are the three scenarios that could come out of this. The court case is really a bargaining chip in the economic transaction. He thinks he’s paying too much. They think he’s paying a fair price, and he wants to either pay less or get out of the deal. That’s really what this is all about. And if he gets out of the deal, he doesn’t want to pay damages. They say, “We want the deal. And if you do get out of the deal, you’re going to have to pay us for that.”

Directors & Boards: Do you think his attempt to back out of the deal will ultimately be successful?

Elson: First of all, Delaware does not believe in buyer’s remorse. Delaware will not excuse an obligation under a contract simply because you decide you no longer want it, and they make it very difficult once a contract has been signed for you to get out of it. The only way out of it is alleging fraudulent or bad behavior on the part of one of the parties. It’s a high bar. We don’t know whether he’s going to be able to prove that or not. He’s alleging some problematic conduct. But was it fraudulent? Was it a done with malfeasance? That’s a tough one. The odds are not in his favor. Traditionally, in Delaware, they set a pretty high bar for letting you walk. I would say he has probably the tougher time at this point than Twitter. But we don’t know what’s going to come out in depositions or at trial. Are there emails out there? What kind of testimony will Musk be able to elicit from Twitter? Twitter claims that there’s nothing wrong here at all. He claims there is. That’s a matter for a judge to decide ultimately. 

Directors & Boards: What do you think the potential long-term effects of this situation are for Twitter? 

Elson: It’s very disruptive to the company itself, not knowing who was going to be there and for how much longer. What is the direction the company is going to take with your job if there’s a takeover? If not, what happens to the company? Has that brand been damaged by the accusations that have been floating around? How much attention has been devoted to this as opposed to the operation of the business itself? And that’s why you have a breakup fee, frankly. If you’re going to waste my time on a transaction you’re not going to consummate, I need to be made whole for the pain you caused me. That’s what the breakup fee is all about.

Directors & Boards: Is there a lesson that boards can take out of a failed relationship between Twitter and Musk? Where did this go wrong, and what could the board have done about it?

Elson: They originally offered him a seat on the board. I think they took every step they could to appease his concerns. Ultimately, his concerns were so fundamental that they probably weren’t appeasable. He offered a strong price, they took it — and that was the right thing to do, I believe. That’s your legal obligation. If you decide the company is for sale, you have an obligation to get the highest possible price for your investors. That’s what they’ve done, and that’s why they’re suing to enforce the agreement, which they should do. From a shareholder standpoint, it’s the appropriate thing to do. If he does walk, the damages that would come to the company would be substantial, so they argue. On his side, we’ll have to see. Was he right? Was he misled? That’s hard to figure, but, at this point, I think the board has reacted to it as it should. The lessons are that sometimes things work out, sometimes they don’t. But I think from the board’s perspective, you have to keep your eye on the prize, which is value for your investors. Because, if you don’t, who will invest with you in the future?