Two people close to the deal who spoke on condition of anonymity because they are not authorized to speak publicly said the tweet reflected an attempt by Musk to lower the price by $44 billion. That amount was settled in recent weeks before the stock market collapsed, making the acquisition relatively more expensive for Musk.
These ‘bot’ accounts that he was concerned about pose a financial risk to Twitter. Musk has said he plans to delete these accounts when he completes his takeover of the company. But bots generate revenue just like normal accounts, thanks to viewing the same ads. If there are more fake accounts than Twitter shows, deleting them would mean a drop in revenue.
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Musk, whose net worth has fallen by about $50 billion in recent weeks as markets mistreated Tesla and other tech stocks, is free to pull out of the deal if his feet get cold. Much of Musk’s wealth comes from his 17 percent stake in Tesla. The electric car company is now worth nearly $800 billion. Musk has funded most of his Twitter acquisition, but has yet to put in $21 billion, which he seeks to obtain through external investments†
But even if Musk finds out that Twitter grossly underestimates the number of bots on his service and decides to pull the purchase, he’s still lurking for a $1 billion fee for ending the deal, legal experts say. And if he were to pull out of the deal, he would likely be sued by Twitter, which could claim heavy financial damages for the turmoil Musk has caused since he agreed to take over the company.
Musk and Twitter have not responded to requests for comment.
Musk began secretly buying stock on Twitter this year before publicly disclosing that he had acquired more than 9 percent of the company. He initially agreed to accept a position on the company’s board of directors and cap his ownership stake, but he soon reversed his position and made an offer to take over the entire company, an offer that the board of Twitter accepted. accepted late last month after Musk was able to secure funding. for the deal.
Like most merger agreements, Twitter’s contract with Musk includes a “material adverse effect” clause. Essentially, the clause means that if something important happens to Twitter before the deal is closed, and it affects the company’s long-term operations in a significant way, the deal could be called off.
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But the bots problem isn’t enough, says Urska Velikonja, a law professor at Georgetown University. “If he tries to litigate it, he loses,” she said.
Twitter has long said that about 5 percent of its user accounts are bots, but that number has been researched and several reports over the years have suggested that the number of bots is much higher. And since Musk stated that he would solve Twitter’s bot problem, he would find it difficult to argue that a plethora of bots on the platform represent everything he didn’t already know when he made the purchase offer.
Velikonja said there have been very few instances where an acquirer has successfully argued in court that a material adverse change had occurred. The groundbreaking example, she said, was a 2018 ruling in favor of Fresenius SE, which had agreed to acquire generic drug maker Akorn.
After agreeing to acquire the company for $4.75 billion, Akorn said it received information from an anonymous whistleblower who claimed that Akorn had failed to comply with legal requirements and withheld that information from its buyers. In a rare ruling, the judge in the case said Akorn’s “gross inaccuracies” were grounds for terminating the deal. Akorn did not respond to a request for comment.
In 2020, luxury holding company LVMH Moët Hennessy Louis Vuitton SE withdrew from its agreement to acquire Tiffany & Co. to acquire for $16 billion after the start of the global pandemic. Even the pandemic was not enough justification. LVMH claimed that the French government, where LVMH is located, had blocked the deal. Tiffany sued anyway. The two companies eventually went through with the $16.8 billion deal this year.
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Musk may not have a legal ground to stand on, but a bid to end the deal could still be worth a shot. Just tweeting that the deal was “on hold” caused Twitter’s stock price to plummet. If Musk pulls out of the deal, Twitter will be worse off than it was before the deal, with a shrunken stock price, a shaken management team and an uncertain future. Any damages Twitter could sue Musk in a long, protracted lawsuit would be small consolation.
Musk has a history of using Twitter to move markets, which in some cases has caught the attention of regulators. He tweeted in 2018 that he had secured funding to take Tesla private for $420 a share. The SEC fined him $20 million because the tweet was untrue.
If Twitter negotiates and accepts a lower price for the sale, it will raise other concerns, experts say. Shareholders are already suing Twitter, claiming the $44 billion price is too low to begin with. More lawsuits are likely to follow.
Musk’s ability to rattle Twitter with his own tweets is detailed in the merger agreement he signed with the company. Neither Musk nor Twitter are allowed to make announcements about the agreement without the other party’s permission, but a carve-out gives Musk permission to tweet about it.
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Still, Musk is walking a fine legal line when he may be moving stock prices in his favor with his tweets.
“This is something regulators can look into, especially given that he has tweeted things in the past that impacted the market and in one case turned out to be untrue,” said David Rosenfeld, a law professor at Northern Illinois University College of Law. “But it’s unclear if there would be anything that would conflict with what we know now.”
While much has been given to Twitter’s stock price, that number isn’t actually the measure that’s relevant to the court. Twitter’s fundamental financial performance determines the company’s value and selling price. The stock price may have fallen, but the company’s ability to monetize advertising hasn’t changed significantly.
What has changed is that if Musk is unable to find more investors, he will put a much larger percentage of his wealth into the Twitter purchase.