In a sharp six-paragraph letter to Twitter on Monday, lawyers for Elon Musk, the world’s richest man, voiced their displeasure.
Twitter was “actively resisting and thwarting” Mr Musk’s rights as he struck a $44 billion deal to buy the social media service, the lawyers wrote. The company was “refusing requests for data from Mr. Musk” to disclose the number of fake accounts on its platform, they said. It amounted to a “manifest material breach” of the agreement, the lawyers argued, giving Mr Musk the right to break the agreement.
The letter, which was delivered to Twitter and filed with the Securities and Exchange Commission, intensified Mr. Musk’s campaign to end the blockbuster acquisition. After striking a deal to buy Twitter in April, Mr Musk, 50, repeatedly suggested he might want to scrap the purchase. Monday’s letter contained the most direct words yet about his desire to step down and crystallized his legal case for doing so.
It added another degree of uncertainty about whether Mr Musk would make the deal, even though he waived his right to do due diligence on Twitter when he bought it. The letter also raised the prospect of a contentious legal battle if either side takes the case to court. If Mr. Musk went that route, the terms of the deal give Twitter the right to sue him to force the acquisition to go ahead, if its debt financing for the purchase remains intact.
The letter also caused a few eye rolls. Mr Musk, who runs electric car maker Tesla and rocket company SpaceX, is famous for his mercury and has often been aggressive and negotiating, making his latest bet not entirely unexpected.
“It’s a move Twitter investors have been preparing for for weeks, the moment Elon Musk’s random ruminations in tweets were distilled into a formal letter to regulators,” senior analyst Susannah Streeter wrote. investments and markets at Hargreaves Lansdown. “Takeover was always meant to be a bumpy ride.”
Twitter said the sale to Mr. Musk remained on track. “We intend to complete the transaction and implement the merger agreement at the agreed price and terms,” a spokesperson said, adding that the company “will continue to cooperatively share information with Mr. Musk.” to complete the transaction”.
Behind the scenes, Twitter shared information with Mr. Musk for about a month without any breakdown 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’s stock fell 1.5% on Monday to close at $39.56, well below the $54.20 per share price Mr. Musk agreed to pay for the company.
Mr. Musk did not immediately respond to a request for comment.
Mr Musk, who has complained about fake Twitter accounts and bots for weeks, seemed to have some leverage on the issue with others. After Mr. 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 users of his ‘robots,'” his office said in a statement. statement.
Twitter declined to comment on Mr Paxton’s investigation.
When Mr. Musk agreed to buy Twitter in April, he said he wanted to take the company private, allow more free speech on the platform and improve the service’s features. But in the weeks that followed, the stock market plunged on fears of inflation, war in Ukraine and supply chain challenges.
The slowdown hit shares of companies such as Tesla, which is Mr. Musk’s main source of wealth. The turmoil has also rattled credit markets, potentially making it harder for banks to sell debt that is typically raised to fund a takeover. Analysts have speculated that these factors gave Mr Musk buyer’s remorse for spending $44 billion on the social media company..
In recent weeks, Mr. Musk has threatened to suspend the deal on Twitter because of his number of fake accounts. Last month, he tweeted that ‘the deal can’t move forward’ until Twitter shows ‘proof’ that these accounts represent less than 5% of its users, as the company has repeatedly said. occasions. He also made similar remarks at a conference in Miami, indicating he may be trying to lay the groundwork to rework the deal.
In doing so, Mr. Musk appeared to be building a case to claim that Twitter had suffered a “material adverse change” that would significantly affect its business, which could allow him to break the agreement. Still, legal experts have questioned the merits of that argument, especially since Twitter has long since disclosed that fake accounts make up around 5% of its users.
Mr. Musk’s letter on Monday, however, represented a new strategy. Rather than simply saying the billionaire didn’t believe Twitter’s numbers, his lawyers said in the letter that the company was breaching its obligations by not giving Mr. Musk information he deemed important to the deal – in this case, how does that explain its number of robots.
The lawyers wrote that Mr. Musk had “repeatedly” requested more information about how Twitter measured spam and fake accounts on its platform and that he had “clearly stated that he did not believe that the company’s lax testing methodologies were adequate, so he had to investigate. own analysis.
How Elon Musk’s Twitter deal went down
A successful business. Elon Musk, the world’s richest man, capped off what appeared to be an unlikely attempt by the notorious mercurial billionaire to buy Twitter for around $44 billion. Here’s how the case unfolded:
They said Twitter’s cooperation was needed to secure the debt funding the banks have pledged to fund. Morgan Stanley and other lenders took on $13 billion in debt to help pay for Mr Musk’s takeover. These commitments are governed by the same legal contracts as the transaction.
“What he’s actually doing is a much smarter attempt to get out of the merger deal,” said Ann Lipton, professor of corporate governance at Tulane Law School. “If Twitter really blocked requests for information, and those requests for information were necessary or reasonable for Musk to obtain his funding – he claims in this letter – then in theory it would be a breach that would allow Musk to leave. ”
Twitter could, in turn, claim it doesn’t have the information Mr. Musk requested or that the deal doesn’t need to be done, she said.
A deal is expected to be reached by October 24. If it is not concluded by then, each party can leave. If the deal is delayed by regulatory approvals at that time, Mr. Musk and Twitter would still have six months to close. The deal includes a $1 billion severance fee for both parties, subject to certain conditions.
In many ways, the agreement also 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 financing side, Mr. Musk revealed in a filing last month that he had increased his personal cash commitment to the deal, canceling a planned loan against shares of Tesla. He also said he was in talks with other Twitter shareholders, including the company’s co-founder Jack Dorsey, about transferring their existing shares into the company after it goes public.
For Twitter, closing the deal is existential. The company has struggled to deliver consistent financial results and grow the number of users.
Parag Agrawal, chief executive of Twitter, last month slashed the company’s discretionary spending and froze new hires. Since taking office in November, he has shaken up the company’s top ranks and is planning more changes. He also asked employees to try to stay the course.
“I know we are going through a period of uncertainty,” he said at a recent company meeting. “We focus on our work.”