The up-and-down saga of Elon Musk’s effort to acquire Twitter took a turn this week that many long suspected: The Tesla CEO tweeted something declaring the deal was in jeopardy.
Two people close to the deal who spoke on the condition of anonymity because they’re not authorized to speak publicly said the tweet reflected an effort by Musk to bring the price down from $44 billion. That amount was settled before the stock market tanked in recent weeks, making the acquisition comparatively more expensive for Musk.
These “bot” accounts about which he raised concerns represent a financial risk for Twitter. Musk has said he intends to remove these accounts when he completes his acquisition of the company. But bots generate revenue just as normal accounts do, thanks to viewing the same ads. If there are more fake accounts than Twitter lets on, removing them would mean a drop in revenue.
Late Saturday, Musk tweeted that Twitter’s legal team called to complain that he had violated a non-disclosure agreement he signed with the company because Musk revealed that the Twitter uses a sample of 100 users to determine the number of bots on the platform.
Musk, whose net worth fell by roughly $50 billion in recent weeks as the markets battered Tesla and other tech stocks, is free to back out of the deal if he gets cold feet. Much of Musk’s wealth comes from his 17 percent stake in Tesla. The electric-car company is now worth close to $800 billion. Musk has financed the majority of his Twitter acquisition but still needs to put up $21 billion, which he aims to obtain via outside investments.
Musk alluded to his new economic reality on Saturday. “Whoever thought owning the libs would be cheap never tried to acquire a social media company!” he tweeted.
But even if Musk discovers that Twitter grossly underestimates the number of bots on its service and he decides to back out of the purchase, he still will be on the hook for a $1 billion fee for killing the deal, legal experts say. And, were he to pull out of the deal, he’d be likely to be sued by Twitter, which could claim heavy financial damages for the turmoil Musk has caused since agreeing to acquire the company.
Musk and Twitter did not respond to requests for comment.
Musk secretly began buying stock in Twitter this year before publicly disclosing that he had acquired more than 9 percent of the company. Initially, he agreed to accept a position on the company’s board and to cap his ownership stake, but he soon reversed his position and made a bid to acquire the entire company, an offer Twitter’s board accepted late last month after Musk was able to secure financing for the deal.
Like most merger agreements, Twitter’s contract with Musk contains a “material adverse effect” clause. Essentially, the clause means that if something significant happens to Twitter before the deal is closed, and it affects the company’s long-term business in a major way, the deal can be called off.
But the problem of bots is not sufficient cause, said Urska Velikonja, a professor at Georgetown University’s law school. “If he tries to litigate it, he’s losing,” she said.
Twitter has long said that about 5 percent of its user accounts are bots, but that number has been subject to scrutiny, and several reports over the years have suggested the bot count is much higher. And because Musk declared that he would fix Twitter’s bot problem, he would have a hard time arguing that an abundance of bots on the platform represents anything he didn’t already know when he made the purchase offer.
Velikonja said there have been very few cases of an acquirer successfully arguing in court that a material adverse change had occurred. The landmark example, she said, was a ruling in 2018 in favor of Fresenius SE, which had agreed to acquire the generic drugmaker Akorn.
After agreeing to acquire the company for $4.75 billion, Akorn said it received information from an anonymous whistleblower claiming that Akorn had failed to comply with regulatory requirements and had withheld that information from its purchasers. In a rare ruling, the judge in the case said Akorn’s “gross inaccuracies” were grounds to terminate the deal. Akorn did not respond to a request for comment.
In 2020, the luxury holding company LVMH Moet Hennessy Louis Vuitton SE backed out of its agreement to acquire Tiffany & Co. for $16 billion after the onset of the global pandemic. Even the pandemic wasn’t enough justification. LVMH claimed that the French government, where LVMH is based, had blocked the deal. Tiffany sued anyway. The two companies eventually went through with the deal this year for $16.8 billion.
Musk may not have any legal ground to stand on, but an attempt to exit the deal still may be worth a shot. Just tweeting that the deal was “on hold” sent Twitter’s stock price tumbling. If Musk pulls out of the deal, Twitter will be left worse off than before the deal, with a shrunken stock price, a shaken management team and an uncertain future. Any damages Twitter could recover from Musk in a long, drawn-out lawsuit would be little consolation.
Musk has a history of using Twitter to move markets, which has in some cases drawn attention from regulators. He tweeted in 2018 that he had secured funding to take Tesla private at $420 a share. The SEC fined him $20 million, alleging that the tweet was untrue.
If Twitter negotiates and accepts a lower price for the sale, it will create other headaches, experts say. Shareholders already are suing Twitter, alleging that the $44 billion price is too low to begin with. More lawsuits would be likely to follow.
Musk’s ability to rattle Twitter with his own tweets is something spelled out in the merger agreement he signed with the company. Neither Musk nor Twitter is allowed to make announcements about the agreement without the permission of the other side, but a carve-out gives Musk permission to tweet about it.
Still, Musk is walking a fine legal line when he moves stock prices potentially to his advantage with his tweets.
“This is something that could be looked at by regulators, particularly given he’s got a history of tweeting things out that have had an impact on the market and in one case turned out not to be true,” said David Rosenfeld, a law professor at Northern Illinois University College of Law. “But it’s unclear whether there would be anything that is violative, just given what we know now.”
While much attention has been paid to Twitter’s stock price, that number is actually not the measure of value that is relevant in court. Twitter’s fundamental financial performance is what determines its value and the sale price of the company. Its stock price may have fallen, but the company’s ability to generate revenue from advertising has not changed in any significant way.
What has changed is that if Musk is unable to line up more investors, he’ll be putting a much larger percentage of his net worth into the Twitter purchase.