Elon Musk can’t use Twitter bots to get out of acquisition agreement

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The up-and-down saga of Elon Musk’s bid to acquire Twitter took a turn this week that many long suspected: The Tesla CEO tweeted something declaring the deal was in jeopardy.

Musk said in a tweet early Friday that the deal was temporarily on hold, pending an inquiry into the number of “spam/fake,” accounts that exist on Twitter. He later clarified he was still serious about the acquisition.

Two people close to the deal who spoke on the condition of anonymity because they’re not authorized to speak publicly said the tweet reflected an effort by Musk to bring down the $44 billion price tag. That amount was recent settled before the stock market tanked in weeks, making the acquisition price comparatively more expensive.

These so-called “bot” accounts he raised concerns about representing a financial risk for Twitter. Musk has said he intends to remove these accounts when he completes his acquisition 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 lets on, that would mean a drop in revenue if they are removed.

Musk’s question about bots nothing new for Twitter

Musk, whose net worth dropped roughly $50 billion in recent weeks as the markets roiled Tesla and other tech stocks, is free to back out of the deal if he’s getting cold feet. Much of Musk’s wealth comes from his 17 percent stake in Tesla. The electric car company is now worth close to $800 billion. Musk has financed the majority of his Twitter acquisition but still needs to put up $21 billion, which he aims to offset with outside investments.

But even if Musk discovers that Twitter grossly underestimates the number of bots on its service, Musk will likely still be on the hook for a $1 billion fee for killing the deal, legal experts say. And, were he to pull out of the deal, he’d likely face a lawsuit from Twitter, which could claim heavy financial damages for the turmoil Musk has caused since agreeing to acquire it.

Musk and Twitter did not respond to requests for comment.

Musk secretly began buying stock in Twitter earlier this year before publicly disclosing he had acquired more than nine percent of the company. Initially, he agreed to accept a position on the company’s board and to cap his ownership stake in the company, but he soon reversed his position and made a bid to acquire the entire company, an offer Twitter’s board accepted late last month after Musk was able to secure financing for the deal.

Like most merger agreements, Twitter’s contract with Musk contains a “Material Adverse Effect” clause. Essentially, the clause means that if something significant happens to Twitter before the deal is closed, and it affects the company’s long term business in a major way, then the deal can be called off.

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Bots just won’t cut it, said Urska Velikonja, a law professor at Georgetown University’s law school. “If he tries to litigate it, he’s losing,” she said.

Twitter has long said that about five percent of its users are bots, but that number has been subject to scrutiny, and several reports over the years have suggested it is much higher. And because Musk himself has promised to fix Twitter’s bot problem, he would have a hard time arguing that an abundance of bots on Twitter represents anything he didn’t already know when he made the offer.

Velikonja said there have been very few, if any, cases where an acquirer was able to successfully argue in court that a Material Adverse Change occurred. The landmark example, she said, was a ruling in 2018 in favor of Fresenius SE, which had agreed to acquire generic drugmaker Akorn, Inc.

After agreeing to acquire the company for $4.75 billion, Akorn said it received information from an anonymous whistleblower claiming Akorn had failed to comply with regulatory requirements and withheld that information from its acquirers. In a rare ruling, the judge in the case said the “gross inaccuracies” provided by Akorn were grounds to terminate the deal. Akorn did not respond to a request for comment.

In 2020, luxury holding company LVMH Moet Hennessy Louis Vuitton SE backed out of its agreement to acquire Tiffany & Co. for $16 billion in the wake of the global pandemic. Even the pandemic wasn’t enough justification. LVMH claimed the French government, where LVMH is based, had blocked the deal. Tiffany sued anyway. The two companies eventually went through with the deal earlier this year for $16.8 billion.

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Musk may not have any legal ground to stand on, but it still may be worth a shot. Just tweeting that the deal was “on hold” sent Twitter stock price tumbling. If Musk pulls out of the deal, Twitter will be left worse off than before the deal with a shrunken stock price, a shaken management team and an uncertain future. Any damages Twitter is able to recover from Musk in a long, drawn out lawsuit will be little consolation.

Musk has a history of using Twitter to move markets, which has in some cases drawn attention from regulators. He tweeted in 2018 that he had secured funding to take Tesla private at $420 a share. The SEC fined him $20 million, alleging that the tweet was untrue.

If Twitter negotiates and accepts a lower price for the sale, it will create other headaches, experts say. Shareholders are already suing Twitter, alleging the $44 billion price tag is too low to begin with. More lawsuits would likely follow.

Musk’s ability to rattle Twitter with his own tweets is something spelled out in the merger agreement he signed with the company. Neither Musk nor Twitter is allowed to make announcements about the agreement without the permission of the other side, but a carveout gives Musk permission to tweet about it.

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Still, Musk is walking a fine legal line when he moves stock prices potentially to his advantage with his tweets.

“This is something that could be looked at by regulators, particularly given he’s got a history of tweeting things out that have had an impact on the market and in one case turned out not to be true,” said David Rosenfeld, a law professor at Northern Illinois University College of Law. “But its’ unclear whether there would be anything that is violative, just given what we know now.”

While much attention has been paid to Twitter’s stock price, that number is actually not the measure of value that is relevant in court. Twitter’s fundamental financial performance is what determines its value and the sale price for the company. Its stock price may have dropped, but the company’s ability to generate revenue from advertising has not changed in any significant way.

What has changed is that if Musk is unable to line up more investors, he’ll be putting a much larger percentage of his net worth into the Twitter purchase.

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