Elon Musk Threatens to End Twitter Deal Without Spam Account Information

In a six-paragraph letter to Twitter on Monday, lawyers for Elon Musk, the richest man in the world, voiced their displeasure.

Twitter was “actively resisting and thwarting” Musk’s rights as he concluded a $44 billion deal to buy the social media service, the lawyers wrote. The company was “refusing Musk’s requests for data” to disclose the number of fake accounts on its platform, they said. This represented a “clear material violation” of the agreement, the lawyers continued, giving Musk the right to terminate the agreement.

The letter, which was delivered to Twitter and filed with the Securities and Exchange Commission, intensified Musk’s campaign to end the successful acquisition. After closing a deal to buy Twitter in April, Musk, 50, has repeatedly suggested he might want to cancel the purchase. Monday’s letter contained the most direct words yet about his desire to quit and crystallized his legal argument for doing so.

That added another degree of uncertainty about whether Musk would complete the deal, even though he waived his rights to do Twitter due diligence when he bought it. The letter also raised the prospect of a contentious legal battle if either side took the matter to court. If Musk goes down that path, the terms of the deal give Twitter the right to sue him to force completion of the acquisition, if his financing debt for the purchase remains intact.

The letter also sparked some twists. Musk, who leads electric car maker Tesla and rocket company SpaceX, is notoriously mercurial and has often given free rein in his maneuvers and negotiations, making his last move not entirely unexpected.

“This is a move Twitter investors have been preparing for for weeks, the moment Elon Musk’s haphazard ruminations on tweets were distilled into an official letter to regulators,” wrote Susannah Streeter, senior investment and markets analyst. from Hargreaves Lansdown. “Acquisition was always destined to be a bumpy road.”

Twitter said the sale to Musk remains ongoing. “We intend to close the transaction and enforce the merger agreement at the agreed price and terms,” ​​a spokesperson said, adding that the company “will continue to cooperatively share information with Musk to consummate the transaction.”

Behind the scenes, Twitter shared information with Musk for about a month without any interruption in communication, said a person with knowledge of the situation, requesting anonymity because the discussions were confidential.

Sean Edgett, Twitter’s general counsel, also sent an email to employees Monday morning reiterating the company’s commitment to closing the deal, according to a copy of the memo obtained by The New York Times.

Twitter shares fell 1.5 percent on Monday to close at $39.56, far below the $54.20 per share price Musk agreed to pay for the company.

Musk did not immediately respond to a request for comment.

Musk, who has complained about fake Twitter accounts and bots for weeks, seems to have some traction on the matter with others. After Musk’s letter to Twitter became public on Monday, Ken Paxton, the Texas attorney general, said he was opening an investigation into the company “for potentially misleading Texans about the number of its ‘bots’ users.” “, his office said in a statement. declaration.

Twitter declined to comment on Paxton’s investigation.

When Musk agreed to buy Twitter in April, he said he wanted to take the company private, allow more freedom of expression on the platform and improve the service’s features. But in the weeks that followed, the stock market plummeted on fears of inflation, the war in Ukraine and supply chain challenges.

The recession has hit stocks in companies like Tesla, which is Musk’s main source of wealth. The turmoil has also rocked credit markets, potentially making it harder for banks to sell the debt that is normally raised to finance a takeover. Analysts speculate that these factors gave Musk’s buyer remorse for spending $44 billion on the social media company..

In recent weeks, Musk has threatened to put the Twitter deal “on hold” because of the number of fake accounts. Last month, he tweeted that “the deal cannot go ahead” until Twitter shows “proof” that these accounts represent less than 5% of its users, as the company has repeatedly said. He also made similar comments at a conference in Miami, indicating that he may be trying to lay the groundwork for a rework of the deal.

In doing so, Musk appeared to be building a case to argue that Twitter had experienced a “material adverse change” that would significantly affect its business, which could allow it to break the deal. However, legal experts have questioned the merits of this argument, particularly as Twitter has long reported that fake accounts account for about 5% of its users.

Musk’s letter on Monday, however, represented a new strategy. Rather than simply saying that the billionaire didn’t believe Twitter’s numbers, his lawyers said in the letter that the company was breaching its obligations by not providing Musk with information he deemed important to the business — in this case, as she explains her number. of bots.

Lawyers wrote that Musk had “repeatedly” requested more information about how Twitter measured spam and fake accounts on its platform and that he “has made it clear that he does not believe the company’s lax testing methodologies are adequate, so he must conduct his own testing.” analysis”.

They said Twitter’s cooperation was necessary to secure funding for the debt that the banks had pledged to fund the deal. Morgan Stanley and other creditors have committed $13 billion in debt to help pay off the Musk takeover. These commitments are governed by the same legal contracts as the business.

“What he’s really doing is a much smarter attempt to get out of the merger deal,” said Ann Lipton, a professor of corporate governance at Tulane Law School. “If Twitter were actually blocking requests for information, and those requests for information were necessary or reasonable for Musk to get his funding – which is what he’s alleging in this letter – that would be a violation that would allow Musk to walk away. ”

Twitter could, in turn, argue that it doesn’t have the information that Musk is demanding, or that the deal doesn’t need to be closed, she said.

A deal is expected to close by October 24. If it’s not closed by then, either side can fold. If the transaction is delayed by regulatory approvals at that point, Musk and Twitter would have another six months to close. The settlement includes a $1 billion separation fee for both sides, subject to certain conditions.

In many ways, the deal appears to be on the right track. Last week, Twitter announced that it had received regulatory clearance from the Federal Trade Commission to proceed with its sale.

On the funding front, Musk disclosed in a filing last month that he had increased his personal cash commitment to the deal, canceling a planned loan against Tesla stock. He also said he was talking to other Twitter shareholders, including the company’s co-founder Jack Dorsey, about transferring his existing shares to the company after it closes.

For Twitter, concluding the deal is existential. The company has struggled to deliver consistent financial results and increase the number of users.

Parag Agrawal, the chief executive of Twitter, last month slashed the company’s discretionary spending and froze new hires. Since taking over in November, he has shaken the upper echelons of the company and has plans for more changes. He also urged employees to try to stay the course.

“I know we’re going through a period of uncertainty,” he said at a recent company meeting. “We are shifting our focus back to our work.”

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