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Elon Musk has several hurdles to clear before his $44 billion bid for Twitter (TWTR) makes it past the finish line. And the costs to acquire the social media company could escalate as shareholders weigh in.
On Monday, Twitter’s board unanimously approved the Tesla (TSLA) CEO's offer to buy the social media company for $54.20 a share to take it private, following an earlier attempt to block Musk’s hostile takeover.
Merger and acquisition lawyers describe the agreement as an end to the deal's beginning, rather than a sign that it will be completed. Shareholders and regulators, they say, can push back against the proposal. Shareholders, in large enough numbers, can press for a higher share price, or flat-out reject Musk's offer. U.S. regulators can also require transparency and object if they find antitrust concerns.
Twitter's bylaws require the company to give shareholders at least 10 days notice before a meeting to vote on the deal, which is expected to close in 2022.
John Livingstone, a research fellow for Case Western Reserve University School of Law, says shareholder approval is the most significant hurdle for Musk and noted the board's vote is simply a recommendation.
Musk acquired a 9.2% stake in Twitter earlier this month, initially planning to be a passive investor and then agreeing to join the board. He reversed both of those decisions before saying in an April 13 securities filing that he intended to buy Twitter. In a letter and text message to Twitter's board, he offered to buy Twitter for $54.20 a. share — a 54% premium over the last day of trading before he started acquiring shares.
Because Musk lacks a controlling stake, he needs a majority of its shareholders to vote in his favor, according to Livingstone.
“The board can’t do this without the shareholders' approval,” Livingstone said. “The shareholders can take it or leave it.”
University of Chicago Law School professor Todd Henderson said a "no" vote by Twitter shareholders is the only factor that he anticipates could derail the deal, though that seems unlikely.
On the other hand, he points to Twitter's share price, trading at a wide arbitrage spread, around $49 on Tuesday, as an indication that there's some market hesitation about the deal going through.
"The market must think there is some risk of non-consummation," Henderson said, noting Musk's history of making unsubstantiated public statements. "It is unlikely this is regulatory."
Twitter agreed to file a preliminary proxy statement as soon as practicable, and to hold a special meeting for a stockholder vote.
University of Pennsylvania Law School Jill Fisch says the proxy statement is key to persuading Twitter's shareholders to vote yes because it will provide considerably more information than they have right now.
“So that’s really critical that the disclosure be complete and accurate,” Fisch said.
The document will include details such as how Musk intends to finance the purchase, what background events led to the offer, and what will happen to shares held by Twitter’s employees and executives.
SEC will 'look carefully' at Twitter's proxy statement
Before shareholders receive the proxy, the Securities and Exchange Commission must approve it.
“The SEC is going to be looking pretty carefully at the proxy statement,” Fisch said.
The agency will want to ensure that Musk’s public statements about the offer have been complete, accurate, and overall, comply with securities laws, she said.
Even with the SEC's proxy approval, other sticking points could collapse or delay the deal. In large enough numbers, shareholders can sue in chancery court in Delaware, where Twitter is headquartered, to demand a higher share price from Musk. Livingston said the court would seriously consider such a move if 10% or more of Twitter's shareholders object.
And other regulators, including the U.S. Federal Trade Commission, the Federal Communications Commission, and the Department of Justice could ask Musk to address antitrust and other concerns.
According to Livingstone, objecting shareholders may have a compelling argument that Musk's offer is too low, considering that Twitter, at its peak in February 2021, traded north of $77 per share.
The argument is a difficult one to win, he said, given Delaware courts' tendency to defer to boards. However, concerned shareholders could overrule the board, and a decision in their favor could cost the billionaire more than he's currently slated to pay.
Legal experts say the deal must also satisfy antitrust regulators, though traditional competition concerns are less likely to stand in the way given that Musk’s other primary businesses — Tesla, SpaceX, Starlink, The Boring Company, and Neuralink — don't involve social media.
Nonetheless, Fisch says the Biden administration’s general concerns over corporate power are magnified by Musk’s potential control of Twitter, and therefore could attract special scrutiny.
“One could imagine…the antitrust review possibly being more complicated, or taking longer, by subjecting the merger to additional scrutiny,” Fisch said.
Anti-monopoly advocacy group Open Markets Institute disagreed in a statement published Tuesday, saying Musk’s ownership interest in the satellite communications system Starlink is reason for concern.
“Mr. Musk already controls one of the most important internet platforms in the world,” the group said about Starlink. “This means that just as we would now expect the U.S. government to block a takeover of Twitter by Google, Facebook, Comcast, or Verizon, the same rules apply to the owners of Starlink.”
In a regulatory document filed on April 20, Musk indicated he would complete the Twitter acquisition via X Holdings, a company he solely owns and which he founded earlier this month.
Twitter shares closed Tuesday at $49.68 per share, down 3.01% from Monday's close. Meanwhile, Tesla shares continued a decline on Tuesday, closing at $876.42 — down 12.2% from the previous day's close.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.