Elon Musk arrives for the 2022 Met Gala at the Metropolitan Museum of Art on May 2, 2022, in New York.
Angela Weiss/AFP via Getty Images
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Angela Weiss/AFP via Getty Images
Elon Musk arrives for the 2022 Met Gala at the Metropolitan Museum of Art on May 2, 2022, in New York.
Angela Weiss/AFP via Getty Images
Elon Musk wants to scuttle his deal to buy Twitter.
In a letter to the company, filed Friday with the Securities and Exchange Commission, Musk accuses Twitter of making “false and misleading representations” about the proliferation of fake accounts on its platform. He says the company has failed to meet its obligations to share data and information he says it needs to evaluate its business.
“Twitter has at times ignored Mr. Musk’s requests, at times denied them for reasons that appear unjustified, and at times has purported to comply by providing Mr. Musk with incomplete or unusable information,” wrote Musk’s attorney, Mike Ringler.
Legal experts say that may not be enough reason to scuttle the $44 billion deal without Musk waiting for a hefty fine. In response to Musk’s letter, Twitter’s chairman said he planned to sue.
“Twitter’s board is committed to closing the transaction at the price and terms agreed upon with Mr. Musk and plans to pursue legal action to enforce the merger agreement. We are confident that we will prevail in the Court of Chancery of Delaware,” said Bret Taylor. in one I tweetreferring to a Delaware court that handles corporate disputes.
The billionaire CEO of Tesla and Space X struck a deal to buy the social media company in April. But almost immediately, he began hinting—and then outright—that he had cold feet. In May he stated that the acquisition was “on hold” as he looked at Twitter’s accounting of how many users are not real people but automated bots or spam. Soon after, Twitter agreed to give him access to its “firehose” — a real-time stream of more than 500 million tweets posted each day. Since then, the two parties have been sharing information and working to close the transaction.
On Thursday, Washington Post reported that the deal was “in jeopardy” because Musk doubts Twitter’s email numbers are verifiable. His team “is expected to take potentially drastic action,” it said post reported.
Bots may not be the only factor in Musk’s change of heart. While his offer of $54.20 per share was initially seen as a low price for Twitter, given that it was trading above $70 last year, tech stocks and the market as a whole have fallen sharply since he arrived the agreement.
As of the closing bell on Friday, Twitter shares were trading around $37 — down 30% from the day Musk’s purchase was announced. In May, Musk even said he might seek to negotiate a lower price.
On Thursday, Twitter pointed to a statement the company issued in June saying it “has and will continue to share information cooperatively” with Musk and that “we intend to close the transaction and implement the merger agreement at the price and agreed terms”. The company expected to hold a shareholder vote on the deal by mid-August.
Musk signed a merger agreement
The two sides signed a legal agreement that Musk would buy Twitter for $54.20 per share. If either party breaks the deal, they may be willing to pay a $1 billion fee to the other party.
In his letter on Friday, Musk cites Twitter’s alleged refusal to provide more information about the bots as a reason for abandoning the deal. But legal experts say it would be an uphill battle.
For years, Twitter has said publicly that it estimates that less than 5% of daily users see ads are spam or bots (but it has also warned that the number could be higher).
Musk disputes this, saying he believes up to 20% of the accounts could be fake. While Twitter gave Musk access to its public data, he told reporters this week that its spam ratings are also based on private data, such as users’ IP addresses, phone numbers, locations and behaviors — and therefore, they are difficult to verify by outsiders.
Even if Twitter’s 5% figure is incorrect, that may not be enough to let Musk back out or change the terms of the deal without paying a high price.
“The merger agreements are designed to avoid exactly what Musk is doing, which is to try to find a little fake thing and then say, ‘Wow, I have to leave now,'” said Ann Lipton, a professor of business law at the Tulane University School of Law. “They specifically say things like, you can’t withdraw unless it’s just false, but extremely false, extremely false, which is very damaging to the company .”
Twitter has a strong case against Musk, experts say
The merger agreement includes what’s known as a “specific performance clause,” which says Twitter can take Musk to court to force him to go ahead with the acquisition as long as he still has funding.
While that might sound risky — and costly — for Twitter, Lipton says the company’s case would be “very strong” and its board has compelling incentives to make the sale happen. Investors expect to receive $54.20 for their shares. The board’s view, according to a person familiar with the deal talks, is that the sale deal with Musk is the most valuable part of Twitter right now.
“They’d rather have $54.20 without a lawsuit, but it’s worth the fight,” Lipton said. Given the company’s current stock price, “$54.20 seems like an incredible deal for Twitter. So there’s a lot they could sacrifice that would be worth it in the end if they forced Musk to shut down.”
Musk could try to get Twitter at a discount
However, some Wall Street analysts say Twitter’s board and management should be open to accepting a lower price to avoid a lengthy legal battle.
“There’s no chance it’s done at $54.20,” said Angelo Zino, analyst at CFRA Research. “You’re either going to see a 15 to 20% drop in the bid price to re-engage Elon Musk, or he’s going to keep playing the bot card.”
Musk’s court appearance could be even more damaging for Twitter at a time when uncertainty over the deal and what the billionaire’s ownership might mean is weighing heavily on the company. Morale is already low and some employees are leaving. CEO Parag Agrawal has shaken up his executive ranks and announced a hiring freeze and spending cuts.
Going to court “doesn’t bode well for your company’s business prospects and adds further uncertainty to the employee base,” Zino said.
That’s also a risk for Musk, Lipton said. “What if he has to buy the company and now he’s damaged it at the same time?”
Ultimately, she said, the billionaire’s antics, however chaotic, seem to have a single purpose: “I don’t think he’s committed to winning. I think he’s committing to not spending $44 billion on Twitter. “
