Elon Musk is threatening to pull out of his $44 billion acquisition of Twitter if the company does not provide more information on how it calculates the number of fake accounts.
In a letter delivered to Twitter on Monday and filed with the Securities and Exchange Commission, Mr. Musk’s lawyers at the law firm Skadden, Arps, Slate, Meagher & Flom argued that Twitter was “actively resisting and thwarting” Mr. Musk’s rights under the terms of his deal to acquire the social media company. His lawyers accused Twitter of a “clear material breach” of its obligations, and said that Mr. Musk had the right to break off the agreement as a result.
The letter said Mr. Musk had “repeatedly” requested more information about how Twitter measures spam and fake accounts on its platform, and that he had “made it clear that he does not believe the company’s lax testing methodologies are adequate so he must conduct his own analysis.” He said Twitter’s cooperation was necessary to secure the debt financing that banks have committed to fund the deal.
Twitter’s response to previous queries from Mr. Musk’s team, which explained the company’s testing methodology, was “tantamount to refusing Mr. Musk’s data requests,” the letter said.
Mr. Musk, who signed a deal to acquire Twitter in April, has, in recent weeks, threatened to put the deal “on hold” over its number of fake accounts. Last month, he tweeted that “the deal cannot move forward” until Twitter shows “proof” that bots only make up less than 5 percent of its users. He made similar remarks at a conference in Miami, indicating that he may be trying to lay the groundwork to renegotiate the deal.
In doing so, Mr. Musk appeared to be laying the groundwork for arguing that Twitter had a “material adverse change” or a change that would significantly affect its business, which could allow him to break off the deal. Lawyers have questioned the merits of that argument, particularly since Twitter has long disclosed that fake accounts represent about 5 percent of its users. Mr. Musk’s letter on Monday, though, represented a new strategy.
“What he is actually doing is a much more clever attempt to get out of the merger agreement,” said Ann Lipton, a professor of corporate governance at Tulane Law School. “If Twitter were really stonewalling information requests, and those information requests were necessary or reasonable for Musk to be able to get his financing — which is what he’s claiming in this letter — then that would conceivably be a breach that allows Musk to walk away.”
Twitter could, in turn, argue it does not have the information that Mr. Musk is demanding, or that it is not necessary for the deal to close, she said.
A deal is expected to close by Oct. 24. If it does not close by then, either side can walk away.
Should the transaction still be awaiting regulatory approval at that time, Mr. Musk and Twitter would have another six months to close it.
Twitter’s stock fell 4 percent in early trading on Monday, to about $38.50 per share, far below the $54.20 price set in the deal agreed with Mr. Musk.