A lawyer representing Musk argued in a letter to Twitter’s general counsel that it was terminating the deal because Twitter ( TWTR ) was “in material breach of multiple provisions” of the original agreement, which was signed in April, according to a regulatory filing late Friday. Musk has raised concerns for weeks, without any visible evidence, that there are more bots and spam accounts on the platform than Twitter has publicly stated. Analysts speculate that the concerns may be an attempt to create a pretext to exit a deal he may now see as overvalued after shares in Twitter and the broader tech market have tumbled in recent weeks. Shares of Tesla ( TSLA ), which Musk planned to rely on in part to finance the deal, have also fallen sharply since he agreed to the deal.
“Twitter’s board is committed to closing the transaction at the price and terms agreed upon with Mr. Musk and plans to take legal action to enforce the merger agreement,” Twitter chairman Brett Taylor said in a tweet on Friday, echoing -early statements by a company that planned to execute the deal. “We are confident that we will prevail in the Delaware Court of Chancery.”
Shares of Twitter fell nearly 6% in after-hours trading Friday immediately following the news, after ending the day down 5%. Tesla shares rose more than 1% in after-market trading.
In May, Musk said the deal was “on hold” as he assessed the number of spam and fake accounts on the platform — a reversal from his previous statements that he wanted to acquire Twitter to root out bots on the platform. Last month, he directly threatened to pull out of the deal, accusing Twitter of violating the merger agreement by failing to provide the data he said he needed to assess the number of spam and fake accounts on the platform. In response, Twitter agreed to hand over its “fire” stream of tweets.
Still, Musk’s lawyer argued in Friday’s letter that Twitter “failed in its contractual obligations” to provide Musk with sufficient data and said Twitter “appears to have made false and misleading statements relied upon by Mr. Musk” when agrees to a deal.
“For nearly two months, Mr. Musk has sought the data and information necessary to ‘make an independent assessment of the prevalence of fake or spam accounts on the Twitter platform,'” Friday’s letter said. “This information is fundamental to Twitter’s business and financial performance and is necessary to consummate the transactions contemplated by the Merger Agreement.”
It continued: “Twitter has been unable or unwilling to provide this information. Twitter has sometimes ignored Mr. Musk’s requests, sometimes denied them for reasons that appear to be unjustified, and sometimes claimed to comply by providing Mr. Musk with incomplete or unusable information.”
Twitter has repeatedly said it jointly shared information with Musk to close the deal on terms originally agreed upon.
Twitter shares are trading around $36, down nearly 30% from their price on the day Musk and Twitter announced the acquisition and well below the $54.20 a share Musk proposed, suggesting deep skepticism among investors about the deal, which will was carried out at the agreed price. Declining value may also be among the reasons Musk is no longer interested in the deal, analysts said.
What can happen next
By accusing Twitter of materially breaching the merger agreement, Musk appears to be making the case that he shouldn’t be on the hook for the $1 billion listed in the terms of the deal as a breakup fee in the event the acquisition falls through, according to Carl Tobias, a professor of law at the University of Richmond.
“The way these things usually work is if there’s a billion-dollar breakup fee and you’re the one trying to acquire, then that goes against you,” Tobias said, “unless there’s some material breach or some kind of reason that could be offered that would convince a court that Twitter, for example, was not performing the deal.”
Musk’s lawyer claimed in Friday’s letter that Musk requested, but did not receive, information such as the daily monetizable daily active users for the previous eight quarters, as well as access to “the sample set used and the calculations performed” by Twitter to determine that spam and fake accounts represent less than 5% of its daily monetizable user base. Twitter said it relies on public and private information, such as ISP numbers and geographic data, of its users to count bots on the platform.
Although he has signed a binding acquisition agreement, Friday’s letter also claims that Musk has “negotiated access and information rights under the Merger Agreement precisely to enable him to review data and information that is important to Twitter’s 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 seek a ruling that it did not breach its contract with Musk and will likely seek a court order requiring Musk to complete the acquisition, he said.
In evaluating Musk’s claims, Quinn added, the court will likely consider the information Twitter has provided so far and whether Musk’s requests for additional disclosures are reasonable and necessary to close the deal — for example, whether the information Musk is seeking is necessary to obtain of government regulatory approvals or funding commitments.
Even as litigation continues, however, the two sides will likely continue to talk, Quinn said, and the situation could resolve itself through a renegotiated sale price. This type of decision is common in merger disputes, he said, citing a recent deal involving luxury brands Luis Vuitton and Tiffany that went to court but was ultimately completed at a lower price.
Musk’s claim that he needs more information “is a tough argument to make,” Quinn added. “A Delaware judge is going to be quite familiar with how these transactions work and what’s normal and what’s not.”
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