Elon Musk will be sued ‘left and right’ if he walks away from Twitter deal: Former SEC chair

Former SEC Chairman and Kalorama Partners CEO Harvey Pitt joins Yahoo Finance Live to discuss the challenges Elon Musk could face from shareholders and the SEC if he walks away from the Twitter acquisition deal.

Video transcript

AKIKO FUJITA: Elon Musk's Twitter saga continues today after claiming Twitter's legal team accused him of violating a non-disclosure agreement when tweeting about the company's automated users review process. Now this is just the latest in a string of controversy surrounding Musk's potential buyout of the social media platform. And you see Twitter stock today down more than 5%.

Joining us now to discuss is former SEC chairman Harvey Pitt. And Harvey, you know, when the news came out last week that Elon Musk was essentially halting this deal, he said he is still committed, but there were two questions that were raised. One was, is he trying to drive down the price of the deal? And the other is, is he trying to walk away from it? So let's start with the latter. I mean, can he, at this point, walk away from the deal?

HARVEY PITT: He can walk away from this transaction, but only at a very great cost. It will cost him at least a billion dollars and probably more because he will be sued by shareholders left and right if he does that.

BRIAN CHEUNG: Harvey, it's Brian Cheung here. I mean, to kind elaborate on that, there are a lot of kind of strings attached to the transaction that was kind of already agreed to in principle between Elon Musk and the board. So unless he were to make a case that he'd lost the financing for the deal, which is still, as I understand it, lined up, how would he be able to get out of this?

HARVEY PITT: Well, he would argue, I suppose, that Twitter materially misled him by claiming that they didn't have more than 5% spam or false accounts if it turned out, A, that there were more than 5%, and, B, that Twitter knew that and deliberately withheld that information from him. But I think short of that, he can't get out of this transaction without paying a billion dollars upfront, and then more, as I indicated a moment ago.

AKIKO FUJITA: That data, though, that we pointed to, less than 5% being fake accounts and spam accounts, I mean, that was information that was available at the beginning of the month. What do you make of the timing of this?

HARVEY PITT: I think the timing is really a reflection of the fact that this transaction is woefully overpriced. Twitter has been in a decline. And when the board finally succumbed and accepted Musk's offer, it was because they recognized that the offer was far better than anything the company would have been capable of achieving on its own. So that is probably causing Musk to say, let me try to get a better price for this. Now that I've got the company, I want to get a better price to this transaction.

BRIAN CHEUNG: There have been conversations about the way by which Elon Musk has gone about this whole process, whether or not he should have filed the 13D, instead of the original 13G, disclosing himself originally as a passive investor, and then doing things like tweeting things that maybe should have been filed in a 13D. I guess the natural question is, how many violations of SEC rules have there been from Elon Musk throughout this process? And what can the SEC do about it?

HARVEY PITT: I think Musk is a continual SEC violation. He has no respect for the rules of the game and believes that he can do this any way he wants. Even his tweets about putting the deal on hold, first, he said the deal was on hold, and then it turned out later, hours later, he tweeted, but I'm still committed to the transaction.

All of these tweets trigger massive gyrations in the market value for these companies, both Twitter and Tesla. And that's a violation of the SEC's rules. I believe the FCC is investigating him, and he will have to answer for those violations. The problem is, I don't think that those violations will, in any way, shape, or form, cancel the transaction.

AKIKO FUJITA: Well, that was my natural question here, whether, in fact, this deal would be jeopardized as a result, but it sounds like you still think that it's going to go through.

HARVEY PITT: I believe it's going to go through because Musk deliberately committed to a transaction in which he gave up the right to detailed due diligence. And he gave Twitter a $1 billion payment penalty if he doesn't go through. I think there's little choice, but for Musk to go forward with this transaction.

BRIAN CHEUNG: Harvey Pitt, former SEC chairman, now at Kalorama Partners, thanks so much for spending the time with us this morning. Really appreciate it.