Elon Musk threatens to end Twitter deal without information about spam accounts

In a clear six-paragraph letter to Twitter, lawyers for Elon Musk, the world’s richest man, expressed his displeasure.

Twitter actively opposed and thwarted Mr. Musk’s rights as he struck a $44 billion deal to buy the social media service, the lawyers wrote. The company “refused Mr. Musk’s data requests” to disclose the number of fake accounts on its platform, they said. That amounted to a “clear material breach” of the deal, the lawyers sued and gave Mr Musk the right to break the agreement.

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

It added another measure of uncertainty to whether Mr. Musk would complete the deal, even though he had relinquished his rights to do due diligence on Twitter when he bought it. The letter also raised the prospect of a contentious legal battle if one side or the other were to take 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, if his debt financing for the purchase remains intact.

The letter also caused some eye-rolling. Mr. Musk, who heads electric car maker Tesla and rocket company SpaceX, is the famed mercurial and has often winged and traded, making his latest gamble not entirely unexpected.

“This is a move Twitter investors have been rallying for for weeks, the moment when Elon Musk’s haphazard rumination has been distilled into tweets in an official letter to regulators,” wrote Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown. “The takeover was always destined to be a bumpy ride.”

Twitter said sales to Mr. Musk remained on track. “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 work with Mr. Musk to complete the transaction.”

Behind the scenes, Twitter shared information with Mr. Musk for about a month without any breakdown in communications, a person with knowledge of the situation said, requesting anonymity as the discussions were confidential. One of Twitter’s concerns in sharing the information is Mr Musk’s previous statements, both publicly and to Twitter, that he is considering starting a rival social media service, two people familiar with the matter said. Typically, such matters are addressed by adding guardrails, such as restricting who has access to such information, and are negotiated before a deal is struck.

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

Shares of Twitter fell 1.5 percent 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 been complaining about Twitter’s fake accounts and bots for weeks, seems to be getting some traction on the matter in others. After Mr. Musk’s letter to Twitter went public on Monday, Texas Attorney General Ken Paxton said he was opening an investigation into the company “for potentially misleading Texans about the number of ‘bot’ users,” his office said. in a 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 freedom of speech on the platform, and improve the features of the service. But in the weeks that followed, the stock market collapsed on fears of inflation, the war in Ukraine and supply chain challenges.

The downturn has hit stocks of companies such as Tesla, the main source of wealth for Mr. Musk. The turmoil has also rocked credit markets, potentially making it more difficult for banks to sell the debt typically raised to fund a takeover. Analysts have speculated that these factors have made Mr. Musk’s buyer repent of spending $44 billion on the social media company†

In recent weeks, Mr. Musk has threatened to put the Twitter deal “on hold” due to the number of fake accounts. Last month, he tweeted that “the deal can’t go any further” until Twitter shows “evidence” that these accounts make up less than 5 percent 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 reviewing the deal.

By doing so, Mr. Musk appeared to be building a case arguing that Twitter had undergone a “material adverse change” that would significantly affect his operations, potentially causing him to break the deal. But legal experts have questioned the merits of that argument, especially since Twitter has long revealed that fake accounts represent about 5 percent of its users.

Musk’s letter from 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 breaking its obligations by not giving Mr. Musk the information he believed to be important to the deal — in this case, how it for the number of bots.

The lawyers wrote that Mr. Musk had “repeatedly” asked for more information about how Twitter measured spam and fake accounts on its platform and that he had “made it clear that he does not believe the company’s lax testing methods are adequate, so he must his own analysis.”

They said Twitter’s cooperation was needed to secure the debt financing banks have pledged to fund the deal. Morgan Stanley and other lenders have pledged $13 billion in debt to finance the acquisition of Mr. Musk to help pay. Those commitments are governed by the same legal contracts as the deal.

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

Twitter, in turn, could claim it doesn’t have the information Mr. Musk is demanding, or that it doesn’t need to close the deal, she said.

A deal is expected to close on October 24. Then if it doesn’t close, both parties can walk away. If the transaction is delayed by regulatory approvals at that point, Mr. Musk and Twitter have an additional six months to complete the transaction. The deal includes a $1 billion split fee for both parties, subject to certain conditions.

In many respects, however, the agreement appears to be on track. Last week, Twitter announced that it had received clearance from the Federal Trade Commission to proceed with the sale.

As for the financing, Mr. Musk filed a filing last month with the addition that he had increased his personal cash commitment for the deal and canceled a planned loan on Tesla stock. He also said he was in talks with other Twitter shareholders, including company co-founder Jack Dorsey, about contributing their existing shares to the company after it went private.

For Twitter, completing the deal is existential. The company has encountered difficulties in delivering consistent financial results and increasing its user base.

Parag Agrawal, the CEO of Twitter, cut the company’s discretionary spending last month and froze new hires. Since he took over in November, he has shaken the top of the company and has plans for more changes. He also asked employees to try to keep up.

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