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Elon Musk terminated his agreement to buy Twitter Inc. on Friday, and Twitter’s chairman promised a legal fight.
In a letter sent to Twitter’s
TWTR,
chief legal officer on Friday, the Tesla Inc.
TSLA,
chief executive claimed that he was ending the agreement because Twitter would not share requested information with him, and the information that was shared confirmed his belief that there were more bots on the service than Twitter claims in securities filings.
“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,” reads the letter, which was filed with the Securities and Exchange Commission.
A “Company Material Adverse Effect” would be a material change in the underlying business since the deal was signed or misrepresentation when signing the deal that would allow it to be terminated. In the letter, Musk and his lawyers claim that misrepresentations about the number of bots on the service meets the threshold, but also notes that the business could be facing issues that would also serve the purpose.
“Mr. Musk is also examining the company’s recent financial performance and revised outlook, and is considering whether the company’s declining business prospects and financial outlook constitute a Company Material Adverse Effect giving Mr. Musk a separate and distinct basis for terminating the Merger Agreement,” the letter reads.
Twitter Chairman and Salesforce.com Inc.
CRM,
co-CEO Bret Taylor used the service to respond to Musk and promise to take him to court in Delaware.
“The Twitter Board is committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plans to pursue legal action to enforce the merger agreement,” Taylor tweeted. “We are confident we will prevail in the Delaware Court of Chancery.”
Musk had agreed to purchase Twitter for $54.20 a share in April, after starting to build a position in the social-media company in January. Twitter shares closed Friday at $36.81, then fell more than 6% in after-hours trading after the letter was made public.
In agreeing to purchase the company, Musk waived due diligence and signed a contract to purchase the company for roughly $44 billion. Since that agreement, as stocks have declined sharply, Musk has asked for more information on bot accounts on the service.
The agreement includes a $1 billion breakup fee for either side, with predetermined reasons for breaking the contract. Twitter could seek more than the $1 billion fee in court, up to and including the full $44 billion amount he promised to pay.
In the letter to Twitter, which was addressed directly to Chief Legal Officer Vijaya Gadde, Musk cited Twitter’s bot count as well as other issues with the way it collects and provides data on its monetizable daily active users, or mDAUs.
“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,” the letter reads.
Specifically, Musk claims that the true bot count on Twitter is “wildly higher” than the 5% that Twitter claims in its filings with the SEC, and that Twitter executives admitted in a June 30 call that they include suspended accounts in their mDAU count.
In addition, Musk claims that Twitter’s board declined to provide requested information on its financial performance and expectations.
“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,” the letter reads.
Musk also claims that he was not consulted on staffing changes at Twitter since the deal was signed, including the firing of two executives, the resignations of three other executives, layoffs in the talent-acquisition team that were confirmed by MarketWatch on Wednesday, and a general hiring freeze.
“The Company has not received Parent’s consent for changes in the conduct of its business, including for the specific changes listed above,” the letter concludes. “The Company’s actions therefore constitute a material breach of Section 6.1 of the Merger Agreement. “
Wedbush Securities analyst Daniel Ives called it “a disaster scenario” for Twitter’s board in a note Friday afternoon.
“This is a disaster scenario for Twitter and its Board as now the company will battle Musk in an elongated court battle to recoup the deal and/or the breakup fee of $1 billion at a minimum,” Ives wrote. “Twitter’s stock on a stand-alone basis will now likely trade in the $25-$30 range when the stock opens on Monday with no deal likely.”
