Elon Musk said Friday he wants to terminate his $44 billion deal with Twitter (NYSE: TWTR), according to a letter sent by Musk’s lawyer to the social media company. As a result, Twitter shares plunged once again.
Why is Musk Pulling Out?
Bret Taylor, chair of the board at Twitter, said the company remains committed to completing the deal at the agreed price and intends to take legal action to ensure the transaction gets closed.
“We are confident we will prevail in the Delaware Court of Chancery,” Taylor wrote.
Skadden Arps attorney Mike Ringler sent a letter to the Securities and Exchange Commission (SEC) on Musk’s behalf, accusing Twitter of failing to comply “with its contractual obligations.” The attorney said the social media company did not deliver the requested information and proof that Twitter’s spam accounts make up just 5% of its monetizable daily active users (mDAUs).
These claims were challenged by Musk, who said he believes that number is more likely around 20%.
“Twitter has failed or refused to provide this information,” Ringler wrote. “Sometimes Twitter has ignored Mr. Musk’s requests, sometimes it has rejected them for reasons that appear to be unjustified, and sometimes it has claimed to comply while giving Mr. Musk incomplete or unusable information.”
He accused the social media giant of breaching the merger agreement, citing materially incorrect representations. Twitter responded to Musk’s allegations by saying that it is impossible to compute the number of bot accounts using only public information and that a team of professionals is conducting research to reach the 5% figure.
Ringer also said Twitter breached the terms of their agreement after making layoffs at the company without previously asking for Musk’s approval.
Twitter Eager to Fight Back
According to the terms of the agreement, Musk has to pay $1 billion if he chooses to abandon the deal. However, the social media company can seek legal action and try to enforce the completion of the deal, which is exactly what Taylor said Twitter will do.
All things considered, Musk’s decision to walk away is likely to lead to an extended legal dispute between the billionaire and Twitter. Legal battles over merger deals and acquisitions that are fought in Delaware courts are rarely settled with companies re-negotiating the deal, but rather a judge ordering the completion of the transaction.
Twitter expects the court proceedings to begin in a few weeks and be settled in a couple of months, according to the reports.
Ann Lipton, an associate dean for faculty research at Tulane Law School, said Twitter sits in a good position to claim that it has provided Musk “with all the necessary information and this is a pretext to looking for any excuse to get out of the deal.”
Shares of the social media company recovered sharply after Musk disclosed his stake in April, protecting it from a steep market sell-off that battered other tech companies’ stocks.
The uncertainty around the deal emerged almost instantly after it was announced and continues to grow. Shortly after coming to terms with Twitter, Musk put the deal on hold until the company delivered evidence that its spam bot accounts represent less than 5% of its total users.
Meanwhile, Twitter employees are becoming increasingly concerned as the Twitter-Musk saga unfolds. Some employees were discontent with the decision to sell Twitter to Musk from the beginning as they were worried about how the deal will affect their jobs, wages, as well as ability to continue working remotely.
Wedbush analyst Daniel Ives viewed Musk’s letter as a bad sign for Twitter, saying the social media company will now have to fight Musk in a prolonged court battle to save the deal or recoup a breakup fee of at least $1 billion.
Summary
Twitter shares fell sharply this week after Elon Musk informed the social media company on Friday he is looking to terminate the buyout agreement. Twitter is now taking Musk to court with analysts expecting a long, nasty, prolonged court battle that will act as a major overhang on Twitter shares.
