According to a letter Mr. Musk’s attorney filed with securities regulators, Twitter “is in material breach of multiple provisions of that agreement” and seems to have made “false and misleading representations” when entering into the agreement.
The filing brings to an end nearly two months of intense speculation about Mr. Musk’s plans and paves the way for a potential legal dispute over the course of the social media platform.
Friday afternoon, Twitter’s board of directors chairman, Bret Taylor, tweeted that the board intended to take legal action to enforce the deal at the price and conditions initially agreed upon.
Mr. Taylor tweeted, “We are confident we will win in the Delaware Court of Chancery.”
Twitter’s CEO, Parag Agrawal, retweeted the message.
The business has stated numerous times over the past few weeks that it was communicating with Mr. Musk in order to complete the merger in accordance with the terms of the merger agreement and that it intended to enforce the merger agreement at the agreed-upon price and terms.
There is no guarantee that Mr. Musk will be able to completely back out of the agreement because Twitter is anticipated to contest his legal defenses.
The issue Mr. Musk raised as a concern about the deal almost three weeks after he signed it was cited by Mr. Musk’s attorney as Twitter’s estimates of how many of its daily users are fake or spam accounts.
Following the revelation, Twitter shares decreased by about 6% in after-hours trading on Friday.
The billionaire’s reputation for being unpredictable is strengthened by Mr. Musk’s decision to try to back out of a deal that he initiated, citing a problem he knew about before approving the transaction. As Twitter and other social media platforms struggle with the slowing growth of digital advertising and broader economic uncertainty, it also raises serious doubts about Twitter’s future, which Mr. Musk had promised to revitalize.
Based on the conditions of his April 25 acquisition agreement with Twitter, Mr. Musk might be liable for a minimum $1 billion breakup fee. However, the agreement only gives him a small window of time to back out and pay just that sum; it is unclear whether his grievances regarding Twitter’s account data fall under this clause. If he attempts to cancel the acquisition for any other reason, Twitter has the right under the agreement to try to coerce him into doing so.
Since Mr. Musk tweeted on May 13 that he was temporarily putting the deal “on hold” pending more details about the account issues, the deal’s future has been in doubt. As its primary user count, Twitter has long claimed that spam accounts make up less than 5% of its monetizable daily active users. Musk has speculated that the percentage may be closer to 20%, but he hasn’t specified how he arrived at that conclusion.
The May tweet set off weeks of back and forth during which Mr. Musk repeatedly questioned and made fun of Twitter, frequently on the latter’s own platform, and demanded that it give him more information so he could verify the company’s math. Twitter repeatedly assured him that it was heeding his requests, and eventually gave him access to its ‘fire hose’ of tweets.
Twitter only defended its accounting on Thursday, saying that it typically deletes more than a million spam accounts every day as they are being created or shortly thereafter. It also claimed that in order to identify spam accounts, it uses closely guarded user data, a process that is impossible for outsiders without access to that data to duplicate.
Tech stocks kept dropping as the fake-account fighting took place. Since Mr. Musk announced his all-cash offer to acquire Twitter at $54.20 per share on April 14, the tech-heavy Nasdaq Composite Index has fallen 15%. Through Friday’s close, when they were trading at $36.81 per share, Twitter shares had decreased by almost 20%.
Mr. Musk sold some of the stock in Tesla Inc., the electric vehicle manufacturer he controls (TSLA 2.54 percent), as he arranged financing for the transaction. Since the initial disclosure of Mr. Musk’s interest in Twitter, Tesla share prices have fallen by about 30%.
Outside experts claim that fake and spam accounts are a problem for Twitter as well as other social media platforms, and the company bases some of its calculations about its users on the private information it won’t share, not even with Mr. Musk.
The threat he made regarding the fake and spam accounts, however, raised questions right away. With more than 100 million followers, he is one of Twitter’s most prominent and active users. Despite years of complaining about these issues, he agreed during deal negotiations to forego conducting a thorough investigation of Twitter’s operations.
Now, Twitter must prepare for a complex legal battle to compel Mr. Musk to complete the transaction or provide what it deems to be just compensation in accordance with a legal provision known as “specific performance.” Mr. Musk has options for preventing such a result. He could demonstrate, for example, that Twitter’s business has changed significantly since he agreed to purchase the company or that he was unable to obtain the required debt financing.
Even when a contract’s terms are explicitly stated, disputes over a deal almost always result in negotiated resolutions that might involve a price reduction or one-time payments.
After the pandemic reduced demand for upscale jewelry, the luxury goods conglomerate LVMH Mot Hennessy Louis Vuitton SE attempted to back out of a deal to acquire Tiffany & Co. for $16.2 billion. Tiffany sued to enforce the contract, and LVMH countersued, claiming that the damage to the company was so great that the original contract was no longer enforceable. Later, the parties reached an agreement to end the litigation and reduce the price by a relatively small $430 million.
According to people familiar with the situation, Twitter’s advisors have suggested that the company’s contract offers more seller-friendly protections than Tiffany’s and that it has legal options to make sure Mr. Musk honors the agreement. The $44 billion sale rather than a $1 billion breakup fee has, according to the people, been determined by its board to be the best outcome for shareholders.
If the transaction fails, Twitter will be left with the difficult task of persuading investors about its own strategies for expanding in a challenging economic environment after being betrayed by a fervent supporter of the platform who, despite everything else, had consistently touted its potential. Mr. Musk outlined a number of changes he had in mind for Twitter, including reducing the amount of content moderation and reducing the platform’s reliance on advertising, which currently makes up about 90% of its revenue.
The CEO of Twitter, Mr. Agrawal, has kept running the company despite Mr. Musk’s scrutiny, public criticism, and a deteriorating macroeconomic environment. The business now needs to reorganize after a protracted process that left both employees and investors uncertain.
Twitter announced in April that it was abandoning ambitious user and revenue targets. The business announced in May that it was halting hiring and trying to reduce expenses as it dealt with the disruptions in the digital advertising market and the conflict in Ukraine. The company revealed the departure of two senior executives the same day. A third of the company’s hiring team was let go on Thursday.
In the filing on Friday, Mr. Musk’s attorney claimed that Twitter had changed the company materially without his permission by firing some employees, putting a hiring freeze in place, and taking other steps.
The deals Mr. Musk has made in the past have occasionally gotten him into legal trouble. On Twitter in 2018, he claimed to have “funding secured” to take Tesla private. Due to what it considered to be a false statement, the SEC fined Mr. Musk. As part of the agreement, Mr. Musk also renounced his position as chairman of Tesla. Mr. Musk filed a lawsuit to have the settlement annulled.
Financial institutions hoping to make the deal happen could also suffer a loss. According to a prior regulatory disclosure, Twitter’s bankers would stand to earn tens of millions in advisory fees upon closing.
JPMorgan Chase & Co. could earn $53 million, including $5 million upfront, while Goldman Sachs Group Inc. would stand to make about $80 million, including $15 million upfront.