Friday, January 27, 2023

Elon Musk is canceling the $44 billion Twitter takeover agreement

Elon Musk moved to cancel his $44 billion deal to buy Twitter on Friday afternoon, the latest twist in a whirlwind process in which the billionaire Tesla CEO became the company’s largest shareholder, turned down a board seat, agreed to buy the social media platform, and then began raising doubts about the deal’s viability. The next chapter in the tale is almost certainly going to be a courtroom brawl.

According to a regulatory filing Friday evening, a lawyer for Musk said in a letter to Twitter’s top lawyer that he is terminating the transaction because Twitter (TWTR) is “in significant breach of various conditions” of the original agreement, which was signed in April.

Musk has been expressing worries for weeks, without providing any evidence, that there are more bots and spam accounts on the site than Twitter has officially stated.

Analysts suspect that the worries are an attempt to establish a pretext to get out of a purchase that he may now regard as expensive, after the recent declines in Twitter shares and the larger tech sector.

Tesla (TSLA) stock, on which Musk planned to rely in part to finance the acquisition, has also plummeted since he agreed to it.

“The Twitter Board is committed to completing the acquisition on the price and conditions agreed upon with Mr. Musk and plans to pursue legal action to enforce the merger agreement,” Twitter board chair Bret Taylor said in a tweet Friday, reiterating past assurances by the firm that is expected to proceed with the sale. “We are confident in our ability to triumph in the Delaware Court of Chancery.”

Twitter shares sank over 6% in after-hours trading Friday on the announcement, after falling 5% during the day. Tesla stock rose more than 1% in after-hours trading.

Musk stated in May that the transaction was “on pause” while he assessed the quantity of spam and phony accounts on the network, reversing prior claims that he intended to acquire Twitter to eliminate bots.

He openly threatened to walk away from the transaction last month, accusing Twitter of violating the merger agreement by failing to provide the data he claims he requires to assess the volume of spam and fraudulent accounts on the network. Twitter agreed to provide up its “firehose” of tweets in response.

Nonetheless, Musk’s lawyer said in a Friday letter that Twitter has “Twitter “appears to have made false and misleading assurances on which Mr. Musk relied” when agreeing to the arrangement, and has “failed to comply with its contractual responsibilities” to give Musk appropriate data.

Mr. Musk has been looking for data and information for over two months in order to “conduct an impartial evaluation of the incidence of false or spam accounts on Twitter’s network.” 

“The letter says on Friday. “This information is critical to Twitter’s business and financial performance, and it is required to complete the transactions contemplated by the Merger Agreement.”

Twitter’s stock is trading at $36, down about 30% from the day Musk and Twitter announced the acquisition, and considerably below Musk’s offer price of $54.20 per share, indicating profound concern among investors about the deal coming through at the agreed-upon price.

Possibly upcoming events

According to Carl Tobias, a law professor at the University of Richmond, by accusing Twitter of materially breaching the merger agreement, Musk appears to be laying the groundwork for an argument that he should not be held liable for the $1 billion set out in the deal terms as a breakup fee if the acquisition fell through.

“The way these things normally operate is that if there’s a billion-dollar breakup fee and you’re the one attempting to acquire, then it’s enforced against you,” Tobias explained, “unless there’s some kind of serious breach or some kind of cause that can be given forth that persuades a judge that Twitter, for example, is not making good on the agreement.”

Musk’s lawyer said in Friday’s letter that Musk sought, but did not get, information such as the daily number of monetizable daily active users for the preceding eight quarters, as well as access to “the sample set utilized and computations made” by Twitter to decide that spam and false accounts account for less than 5% of its monetizable daily user base. 

Twitter has stated that it counts bots on its network using public and private information from its users, such as ISP numbers and location data.

Despite having signed a formal acquisition agreement, Musk is said to have “negotiated access and information rights inside the Merger Agreement exactly so that he could evaluate data and information that is vital to Twitter’s business before funding and finalizing the transaction.”

According to Brian Quinn, a legal professor at Boston College, Twitter is expected to seek the court for two things in its lawsuit against Musk. He expects Twitter to seek a decision that it has not breached its contract with Musk, as well as a judicial injunction ordering Musk to complete the transaction.

Even if the case proceeds, Quinn believes the two parties will continue to communicate, and the problem might be resolved by a renegotiated selling price. 

He cited a recent agreement between luxury labels Luis Vuitton and Tiffany, which went to court but was finally finalized at a cheaper price, as an example of this sort of settlement in merger issues.

Musk’s contention that he requires additional knowledge “is a difficult case to make,” Quinn noted. “A Delaware judge will be well familiar with how these deals work and what is regular and what is not.”

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