A lawyer representing Musk stated in a letter to Twitter’s lead attorney that he was terminating the deal because Twitter (TWTR) is “materially violating several provisions” of the original agreement, which was signed in the April, according to a regulatory document Friday evening. . Musk has expressed concern for weeks, with no apparent evidence, that there are more robots and spam accounts on the platform than Twitter has publicly said. Analysts have speculated that concerns may be an attempt to create a pretext to get out of a deal that may now be considered too precious, after shares of Twitter and the broader technology market have dwindled in recent weeks. Shares of Tesla (TSLA), which Musk had planned to rely in part to fund the deal, have also declined sharply since he accepted the deal.
“The Twitter Board agrees to close the transaction on the price and terms agreed with Mr. Musk and plans to take legal action to enforce the merger agreement,” said Twitter board chairman Bret Taylor, in a tweet Friday, echoing previous statements from the company that had planned to carry out the deal. “We are confident that we will prevail in the Delaware Chancellery Court.”
Twitter shares fell nearly 6% in out-of-hours operations on Friday immediately after the news, after ending the day with a 5% drop. Tesla shares gained more than 1% in out-of-hours operations.
Musk said in May that the deal was “pending” as it assessed the number of spam and fake accounts on the platform, a reversal of his earlier statements he wanted to acquire Twitter to eradicate the platform’s robots. Last month, he directly threatened to abandon the deal, accusing Twitter of breaching the merger deal by failing to provide the data it says it needs to assess the number of spam and fake accounts on the platform. In response, Twitter agreed to deliver its stream of “fire manga” tweets.
However, Musk’s attorney alleged in Friday’s letter that Twitter “has failed to fulfill its contractual obligations” to provide Musk with sufficient data, and said Twitter “appears to have made false and misleading statements. on which Mr. Musk relied “when he accepted the agreement.
“For nearly two months, Mr. Musk has been searching for the data and information needed to“ make an independent assessment of the prevalence of fake or spam accounts on the Twitter platform, ”the letter reads on Friday. it is critical to Twitter’s business and financial performance and is necessary to complete the transactions contemplated by the merger agreement. ”
He continues: “Twitter has failed or refused to provide this information. Sometimes Twitter has ignored Mr. Musk’s requests, sometimes rejected them for seemingly unjustified reasons, and sometimes has claimed compliance. while giving Mr. Musk incomplete or incomplete. unusable information “.
Twitter has repeatedly said it has shared information cooperatively with Musk to close the deal with the originally agreed terms.
Twitter shares are trading around $ 36, up nearly 30% from their price the day Musk and Twitter announced the acquisition and well below the $ 54.20 per share Musk offered, suggesting a deep skepticism among investors about the deal that was carried out at the agreed price. The decline in value may also be one of the reasons Musk is no longer interested in the deal, analysts say.
What could happen next
By accusing Twitter of materially breaching the merger agreement, Musk appears to be creating the argument that he should not be stuck with the $ 1 billion set out in the terms of the deal as a severance fee in the event that the acquisition failed, he reported. Carl Tobias, Professor of Law at the University of Richmond.
“The way these things usually work is that if there’s a $ 1 billion breakout rate and you’re the one trying to acquire, that applies against you,” Tobias said, “unless there’s some kind of material breach or some kind of reason that can be offered to persuade a court that Twitter, for example, is not doing the deal right. “
Musk’s attorney stated in Friday’s letter that Musk has requested, but not received, information such as the daily number of daily active users monetizable during the previous eight quarters, as well as access to the “set of samples used and calculations performed ”by Twitter to determine that spam and fake accounts account for less than 5% of its daily monetizable user base. Twitter has said it relies on public and private information, such as ISP numbers and geographic data, for its users to count bots on the platform.
Despite signing a binding acquisition agreement, Friday’s letter also states that Musk “negotiated access and information rights within the Merger Agreement precisely in order to review the data and information that is important to the Merger Agreement. Twitter business before financing and completing the transaction “.
Twitter is likely to ask the court for two things in its lawsuit against Musk, said Brian Quinn, a law professor at Boston College. Twitter is expected to request a decision that has not violated its contract with Musk, and will likely seek a court order forcing Musk to complete the acquisition, he said.
When evaluating Musk’s claims, Quinn added, the court will likely consider the information Twitter has provided so far and whether Musk’s requests for further disclosures are reasonable and necessary to complete the agreement. for example, whether the information Musk wants is necessary to obtain government regulations. approvals or funding commitments.
As long as any litigation continues, the two sides will likely continue to talk, Quinn said, and the situation could be resolved on its own through a renegotiated sale price. This type of resolution is common in merger disputes, he said, citing the recent deal with luxury brands Luis Vuitton and Tiffany, which went to court but was eventually completed at a lower price.
Musk’s claim to need more information “is a difficult argument to make,” Quinn added. “A Delaware judge will be quite familiar with how these transactions work and what is normal and what is not.”