Yesterday the Washington Post reported that Elon Musk had “stopped engaging in certain discussions around funding for the $44 billion deal” and that the deal was in serious jeopardy, so this news isn’t out of the blue.
Twitter shares were down 5.35% on the report today and closed at $34.84 — far below the $54.20 agreement. For more than a month, there have been signs that Musk has a bad case of buyer’s remorse.
What’s far less clear is that he will be able to walk away from the deal.
He accused Twitter of being “in material breach of multiple provisions” of the merger agreement.
“Mr. Musk is terminating the Merger Agreement because Twitter is in material breach of multiple provisions of that Agreement, appears to have made false and misleading representations upon which Mr. Musk relied when entering into the Merger Agreement, and is likely to suffer a Company Material Adverse Effect (as that term is defined in the Merger Agreement)”
However he signed an agreement to complete a purchase of Twitter. It wasn’t an agreement to think about buying Twitter and the social media company has said it will enforce the deal.
Delaware courts, where this will be adjudicated, have been consistent in ruling that the bar for breaking a merger agreement is extraordinarily high. Musk has said the bot count is too high but Twitter this week released a presentation saying it was below 5%. Legal expert say that even if it was 20% it will be tough to argue it’s a material adverse clause.
Moreover, unless Musk already has conclusive evidence of fraud, he won’t be getting any further information from the company.
This is what he claims he asked for but didn’t receive:
“Mr. Musk is entitled, under Section 6.4 of the Merger Agreement to “all information concerning the business … of the Company … for any reasonable business purpose related to the consummation of the transactions” and under Section 6.11 of the Merger Agreement, to information “reasonably requested” in connection with his efforts to secure the debt financing necessary to consummate the transaction. To that end, Mr. Musk requested on June 17 a variety of board materials, including a working, bottoms-up financial model for 2022, a budget for 2022, an updated draft plan or budget, and a working copy of Goldman Sachs’ valuation model underlying its fairness opinion. Twitter has provided only a pdf copy of Goldman Sachs’ final Board presentation.”
What could be interesting is that if politics comes into play. Texas’ attorney general announced on June 6 it will investigate Twitter for potentially misleading on bots. That looks like an out-and-out case of corruption after Musk moved his company to Texas and considering that Texas is not a regulator of Twitter nor is it located there.
If a judge rules against Musk he would owe enormous damages to Twitter, including the difference between the merger price and trading price, plus potential damages. Given that Musk may now go on offense on the very platform he was intending to buy, he could dig himself a hole (if he hasn’t already).
Some have argued Twitter should kick Musk off the platform but their best revenge may be to leave him on there. His social media presence has been divisive and I believe it’s increasingly eroding the Tesla brand.
In any case, buckle up. This will be a better ride that the Model S Plaid.
Here are some details of accusations:
Specifically, in the Merger Agreement, Twitter represented that no documents that Twitter filed with the U.S. Securities and Exchange Commission since January 1, 2022, included any “untrue statement of a material fact” (Section 4.6(a)). Twitter has repeatedly made statements in such filings regarding the portion of its mDAUs that are false or spam, including statements that: “We have performed an internal review of a sample of accounts and estimate that the average of false or spam accounts during the first quarter of 2022 represented fewer than 5% of our mDAU during the quarter,” and “After we determine an account is spam, malicious automation, or fake, we stop counting it in our mDAU, or other related metrics.” Mr. Musk relied on this representation in the Merger Agreement (and Twitter’s numerous public statements regarding false and spam accounts in its publicly filed SEC documents) when agreeing to enter into the Merger Agreement. Mr. Musk has the right to seek rescission of the Merger Agreement in the event these material representations are determined to be false.
Although Twitter has not yet provided complete information to Mr. Musk that would enable him to do a complete and comprehensive review of spam and fake accounts on Twitter’s platform, he has been able to partially and preliminarily analyze the accuracy of Twitter’s disclosure regarding its mDAU. While this analysis remains ongoing, all indications suggest that several of Twitter’s public disclosures regarding its mDAUs are either false or materially misleading. First, although Twitter has consistently represented in securities filings that “fewer than 5%” of its mDAU are false or spam accounts, based on the information provided by Twitter to date, it appears that Twitter is dramatically understating the proportion of spam and false accounts represented in its mDAU count. Preliminary analysis by Mr. Musk’s advisors of the information provided by Twitter to date causes Mr. Musk to strongly believe that the proportion of false and spam accounts included in the reported mDAU count is wildly higher than 5%. Second, Twitter’s disclosure that it ceases to count fake or spam users in its mDAU when it determines that those users are fake appears to be false. Instead, we understand, based on Twitter’s representations during a June 30, 2022 call with us, that Twitter includes accounts that have been suspended—and thus are known to be fake or spam—in its quarterly mDAU count even when it is aware that the suspended accounts were included in mDAU for that quarter. Last, Twitter has represented that it is “continually seeking to improve our ability to estimate the total number of spam accounts and eliminate them from the calculation of our mDAU…” But, Twitter’s process for calculating its mDAU, and the percentage of mDAU comprised of non-monetizable spam accounts, appears to be arbitrary and ad hoc. Disclosing that Twitter has a reasoned process for calculating mDAU when the opposite is true would be false and misleading.
What’s going to hurt his own case that is that as early as May 13, he said he was putting the deal on hold — less than three weeks after the April 25 agreement.