Elon Musk tells Twitter that he wants out of the deal to buy it

A lawyer representing Musk claimed in a letter to Twitter’s top lawyer that he was terminating the agreement because Twitter (TWTR) is “substantially a breach of several provisions” in the original agreement, which was signed in April, according to a regulatory filing Friday night.
Musk has for several weeks expressed concern, without any apparent proof, that there are a larger number of bots and spam accounts on the platform than Twitter has said publicly. Analysts have speculated that the concerns may be an attempt to create a pretext to get out of a deal he can now see as overpriced, after Twitter shares and the broader technology market have fallen in recent weeks. Tesla (TSLA) shares, which Musk planned to rely on in part to finance the deal, have also fallen sharply since joining the deal.

“The Twitter board is committed to terminating the transaction on the price and terms agreed with Mr. Musk and plans to pursue legal action to enforce the merger agreement,”[ads1]; Twitter chairman Bret Taylor said in a tweet Friday, reflecting previous statements from the company. . the company that it planned to follow up with the agreement. “We are confident we will win in the Delaware Court of Chancery.”

Twitter shares fell nearly 6% in after-sales on Friday immediately after the news, after ending the day down 5%. Tesla shares rose more than 1% in aftermarket.

Musk said in May that the deal was “on hold” when he evaluated the number of spam and fake accounts on the platform – a reversal of his previous statements that he wanted to get Twitter to eradicate bots on the platform. Last month, he directly threatened to walk away from the agreement, accusing Twitter of violating the merger agreement by not providing the data he says he needs to evaluate the number of spam and fake accounts on the platform. In response, Twitter agreed to hand over its “fire hose” stream of tweets.

Nevertheless, Musk’s lawyer claimed in Friday’s letter that Twitter “has not complied with its contractual obligations” to provide Musk with sufficient data, saying that Twitter “appears to have made false and misleading representations that Mr. Musk trusted” when he accepted the agreement. .

“For almost two months, Mr. Musk has been searching for data and information necessary to” make an independent assessment of the prevalence of fake or spam accounts on Twitter’s platform, “the Friday letter said. “This information is fundamental to Twitter’s business and financial results and is necessary to complete the transactions envisaged in the Merger Agreement.”

It continues: “Twitter has failed or refused to provide this information. Sometimes Twitter has ignored Mr. Musk’s requests, sometimes it has rejected them for reasons that appear to be unjustified, and sometimes it has claimed to comply while has provided Mr. Musk with incomplete or useless information. “

Twitter has repeatedly said that in collaboration they have shared information with Musk to terminate the agreement on the originally agreed terms.

Twitter’s stock is trading around $ 36, down almost 30% since the price on the day Musk and Twitter announced the acquisition and well below $ 54.20 per share Musk offered, indicating deep skepticism among investors that the deal will go through at the agreed price. The falling value may also be one of the reasons why Musk is no longer interested in the deal, analysts have said.

What can happen next

By accusing Twitter of a significant breach of the merger agreement, Musk seems to be setting up the argument that he should not be on the hook for the 1 billion stated in the terms of the agreement as a breach fee in case the acquisition fell through, according to Carl Tobias, law professor at University of Richmond.

“The way these things usually work is that if there’s a billion dollar breach fee and you’re trying to get it, it’s being enforced against you,” Tobias said, “unless it’s some kind of substantial breach or a the kind of reason that can be offered that convinces a court that Twitter, for example, is not doing well on the deal. “

Musk’s lawyer claimed in Friday’s letter that Musk had requested, but not received, information such as the daily number of revenue-generating daily active users for the previous eight quarters, as well as access to “sample set used and calculations performed” by Twitter to determine that spam and fake accounts represents less than 5% of the revenue-generating daily user base. Twitter has said that they rely on public and private information, such as ISP numbers and geographic data, on users to count bots on the platform.

Elon Musk pressured Twitter to give him access to a 'fire hose' of data to evaluate robots.  What now?

Despite having signed a binding acquisition agreement, Friday’s letter also claims that Musk “negotiated access and information rights within the Merger Agreement precisely so that he could 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 has not breached its contract with Musk, and it will likely seek a court order requiring Musk to complete the acquisition, he said.

In assessing Musk’s allegations, Quinn added, the court will likely consider the information Twitter has provided so far and whether Musk’s requests for further revelations are reasonable and necessary to complete the deal – for example, whether the information Musk wants is necessary to obtain regulatory action. approvals or financing obligations.

Even if any litigation continues, the two sides are likely to continue talking, Quinn said, and the situation can resolve itself through a renegotiated sale price. That type of solution is common in merger disputes, he said, referring to the recent agreement involving luxury brands Luis Vuitton and Tiffany, which went to court but was eventually completed at a lower price.

Musk’s claim that more information is needed “is a difficult argument to make,” Quinn added. “A judge in Delaware is going to be pretty familiar with how these transactions work and what’s normal and what’s not.”

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