Elon Musk has informed Twitter that he plans to cancel the $44 billion deal to buy the social media company, claiming that Twitter provided “false and misleading” information regarding the number of phony and spam accounts.
A high-stakes legal dispute between the billionaire Tesla CEO and the social media platform is set to begin as a result of Musk’s attempt to back out of the agreement. Bret Taylor, the chair of Twitter, quickly responded by stating that the board was “committed to closing the transaction on the price and terms agreed upon with Mr. Musk” and that legal action would be taken to uphold the agreement.
Taylor continued, “We are confident we will prevail in the Delaware Court of Chancery,” referring to the well-known court for commercial disputes.
In a document filed on Friday, the Tesla CEO’s attorneys alleged that Twitter “appear[ed] to have made false and misleading representations” and that Twitter was “in material breach of multiple provisions” of the sale agreement. According to a preliminary analysis by Musk’s advisors, the number of spam and fake accounts on the platform was “wildly higher” than the 5% Twitter had estimated.
In a separate filing, Musk stated that he is debating whether Twitter’s “declining business prospects” and deteriorating financial outlook are in violation of the contract.
According to the filing, Twitter violated its obligation to “conduct its business in the ordinary course” after chief executive Parag Agrawal froze new hires, let go of two senior employees, and announced this week that a third of the company’s talent acquisition team would be laid off.
Shares of Twitter decreased by almost 5% in after-hours trading.
The decision is the latest development in a dramatic saga that started when Musk first disclosed he had purchased a stake in Twitter in early April with the intention of restoring a “free speech” ethos, combating spam, and reviving growth.
A few weeks later, Musk stunned Wall Street by announcing his offer to acquire Twitter at $54.20 per share, which the company eventually accepted. As a result of concerns about whether Twitter had accurately represented the number of bots and spam accounts, he later declared that the deal was “temporarily on hold.” Some analysts and Twitter insiders assumed that was a case of buyer’s remorse and surmised Musk was attempting to negotiate a lower price.
Musk claimed it would be difficult to obtain financing from banks that agreed to lend him the money to complete the transaction because Twitter’s failure to disclose information about phony accounts would make it difficult.
If Musk pulled out of the deal, he would be required to pay a $1 billion “reverse termination fee,” according to the contract. However, Twitter may attempt to force Musk to complete the transaction if all other closing requirements—including financing—are satisfied. In legal disputes when buyers attempt to terminate agreements, US courts have historically sided with sellers to deter acquirers from doing so on flimsy justifications.
The market capitalizations of tech companies have dropped significantly since Musk agreed to buy Twitter, making the agreed valuation expensive in comparison to competitors. One of Twitter’s main rivals, Snap, has seen its stock price fall more than 65% this year.
Musk originally took out a $12.5 billion margin loan with a dozen lenders, including Morgan Stanley, that was backed by Tesla stock worth $62.5 billion and used to raise $46.5 billion for his bid for Twitter.
Additionally, he secured $13 billion in financing commitments from a group of 13 banks, leaving him responsible for securing the $21 billion in cash that was still needed. When Musk paid off the margin loan in May, the equity portion of his offer grew to $33.5 billion.
When Musk raised more than $7 billion from investors, including billionaire Oracle founder Larry Ellison, venture capital firm Sequoia Capital, Saudi Prince Alwaleed bin Talal, cryptocurrency exchange Binance, and dozens of other equity investors, a portion of the margin loan was repaid. When he let the remaining $6.25 billion expire, the remainder of the margin loan facility disappeared.
In a recent interview with the Financial Times, Musk said he would lift the “morally wrong” ban on former president Donald Trump that was put in place following the deadly attack on the US Capitol on January 6, 2021. Musk has vowed to restore free speech to the platform.
Twitter, which was already under fire for its slow growth, is now in disarray as a result of the takeover process, and the remaining employees are unsure of their jobs and the company’s future.
