Elon Musk is officially trying to pull out of his $44 billion agreement to purchase Twitter. In a filing Friday afternoon with the Securities and Exchange Commission, Musk’s team claims he is terminating the deal because Twitter was in “material breach” of their agreement and had made “false and misleading” statements during negotiations.
“For nearly two months, Mr. Musk has sought the data and information necessary to ‘make an independent assessment of the prevalence of fake or spam accounts on Twitter’s platform,’” Musk’s legal team writes. “Twitter has failed or refused to provide this information.”
Twitter still hopes to close the deal, despite Musk’s attempted termination. Twitter board chairman Bret Taylor wrote that the company will “pursue legal action to enforce the merger agreement” and feels “confident we will prevail” in court.
The Twitter Board is committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plans to pursue legal action to enforce the merger agreement. We are confident we will prevail in the Delaware Court of Chancery.
— Bret Taylor (@btaylor) July 8, 2022
Musk has been setting the stage to abandon the deal since just weeks after he signed the agreement, claiming that Twitter released misleading stats about the prevalence of spam bots on its platform. It’s entirely unclear, however, that Musk can legally abandon his agreement simply because he isn’t happy about the presence of spam on Twitter — something he could have investigated prior to signing the deal.
Twitter has gone to great lengths to show compliance with Musk’s requests. In early June, the company opened up “firehose” access to its service so that Musk could receive and analyze every tweet as it’s posted. The company has also continuously tried to reassure the public that it has spam and bots under control. On Thursday, it told press that it was blocking over a million spam accounts per day, and in May, its CEO wrote a long thread about how Twitter determines how many of its users are bots.
Musk’s team also claims that Twitter breached their agreement when it fired two top executives, laid off part of its talent acquisition team, and instituted a hiring freeze over the past several months because the company did not seek permission to deviate from its “ordinary course” of business.
It’s incumbent that Musk prove that Twitter has breached their agreement, as he can’t just pull out the signed agreement because he feels like it. And there’s good reason for Twitter to want to keep the agreement together: the deal was a potentially lucrative one for Twitter shareholders, offering $54.20 per share, up from the $36.81 it closed at today. There’s also $1 billion on the line as a breakup fee that will be paid by the party at fault.
Both Twitter and Musk will have to make their case to a judge about whether or not the agreement was breached, but Musk will have to meet a high bar to back out. “You’ve got to show that there was something pretty egregious on the other side that wouldn’t allow the agreement to go forward, and I don’t know that he’s going to succeed in convincing judges that that was the case,” says Carl Tobias, a professor at the University of Richmond School of Law.
On some level, Musk’s Twitter acquisition had always seemed more like a game than a real attempt to purchase and grow a business. The deal initially emerged after Musk purchased a 9 percent stake in Twitter (a buying spree he seems to have belatedly informed the SEC of) before agreeing to take a seat on the company’s board, complaining about the company on Twitter, and eventually abandoning his agreement to take a board seat.
Musk seemed to relish the ability to make wishful product plans about free speech and corporate independence more than he wanted to develop a coherent business plan for Twitter. According to The New York Times, Musk laid out goals for Twitter under his leadership that seemed wildly ambitious, to say the least. Musk reportedly told investors he could quadruple both revenue and users in six years. It was never clear what Musk would do to accomplish that.
Update July 8th, 7:40PM ET: Added expert legal perspective and more detail on Musk’s arguments.